COVID-19 was officially declared a global pandemic by the World Health Organization on March 3, 2020. Since then, effective measures have been taken by all government and private bodies to improve the effects of this pandemic. Beyond the health repercussions, this pandemic has presented major disruptions for businesses. It has caused interruptions in trading, devastated the travel and hospitality sector, imposed challenges in meeting the contractual obligations bombarded businesses and commercial activities driving the world towards a recession.
Ministry of Finance issued an office memorandum on February 19, 2020, effectively classifying COVID-19 as a ‘force majeure’ event. The memorandum has persuasive power but is not legally binding on the parties. It will be determined how force majeure provisions are established in each contract and whether such provisions give protection to the parties. COVID-19 should also be considered a “natural calamity,” according to the memorandum.
The term “force majeure” refers to an occurrence or impact that cannot be predicted or controlled. It’s a contractual provision that divides the risk of loss if performance becomes impossible or impractical, especially due to an unforeseen incident that neither party could have predicted.
FORCE MAJEURE CLAUSE IN CONTRACTS
A force majeure clause would require that the performance be disrupted due to circumstances beyond the invoking party’s reasonable control and that the incident be unforeseeable. Whether COVID-19 would qualify as a force majeure event will depend on each particular contract. It depends on 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. The party using the force majeure clause bears the burden of proof. The burden can be discharged where force majeure clause in the contract explicitly provides for events like epidemics, pandemics or government restriction.
A contract’s force majeure clause might include an exhaustive list of events like acts of God, war, terrorism, earthquakes, hurricanes, explosions, or epidemics, or a non-exhaustive list in which the parties simply describe what constitutes force majeure events and then add “and such other acts or events that are beyond the control of the parties.” It would also include the consequences of occurrence of such force majeure event. The suspension of the parties’ responsibilities would be one of the consequences of a force majeure incident.
This clause is crucial for businesses because it relieves the parties from performing their respective obligations and liabilities under the contract for the period that force majeure events persist, as long as the prerequisites for the clause to become applicable are met.
Although Indian courts have not definitively decided whether a pandemic like COVID-19 is a “Act of God”. An argument to that effect can derive support from the decision of the Supreme Court in The Divisional Controller, KSRTC v. Mahadava Shetty, which holds that the expression ‘Act of God’ signifies the operation of natural forces free from human intervention with the caveat that every unexpected natural event does not operate as an excuse from liability if there is a reasonable possibility of anticipating their happening.
The Supreme Court of India has ruled that when a contract mentions “force majeure,” the parties want to protect the performing party from the consequences of something beyond his control. The plea of force majeure would be available to a party only if it can be established that:
- The non-performance was due to circumstances beyond control;
- No reasonable measures could have been taken to prevent or mitigate the occurrence or its consequences.
IF A CONTRACT DOES NOT HAVE A FORCE MAJEURE CLAUSE
This position may appear frightening, but the doctrine of frustration established under Section 56 of the Indian Contract Act, 1872, and views adopted by the Supreme Court of India since 1954 have effectively protected the situation. In a landmark judgment, Energy Watchdog v. Central Electricity Regulatory Commission (2017), 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.
REFERENCES
- The Divisional Controller, KSRTC v. Mahadava Shetty (2003)
- Energy Watchdog v. Central Electricity Regulatory Commission (2017)
- Pallavi Rabhinathan Dugar, Talking Legal: Covid-19, a force majeure event, India Times, https://bangaloremirror.indiatimes.com/opinion/others/talkinglegalcovid-19-a-force-majeure-event/articleshow/75304642.cms
- Nishant Menon, Raheel Kohli, Covid-19: A force majeure event or simply a pandemic? Mondaq, https://www.mondaq.com/india/litigation-contracts-and-force-majeure/913944/covid-19-a-force-majeure-event-or-simply-a-pandemic
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