Aug 29, 2020

The contagion effect of the COVID-19 pandemic is being strongly felt by industries, businesses, organisations across sectors around the world. Governments across the globe have ordered nation-wide lockdowns, restricted foreign travel and have sealed their borders. As a result, economic activities have taken a hit, and companies are under enormous financial burden coupled with an impending uncertainty, over the performance of their existing contracts. The term force majeure is derived from the French word which means ‘Superior Force’.  The term force majeure means any extraordinary events or circumstances which are beyond human control. Such events can be described as an act of god like natural calamities or situation like war, strikes, riots etc. Under these events, both the contracting parties are not at fault and it becomes difficult for them to carry out any form of business. The provision of force majeure in a contract is made to discharge the parties from their obligations by either suspending temporarily or waving them completely so that the non-discharge of obligation does not lead to a breach of contract. The Ministry of Finance in the notification dated 19th Feb 2020, had addressed that the disruption of supply chains due to the spread of corona virus should be considered as a case of natural calamity which is beyond human control and force majeure clause may be invoked, wherever considered appropriate ,by the parties in contract, following the due procedures.

The term force is not defined anywhere in Indian law, but the Indian Contract Act,1874, gives a vague knowledge about force majeure. Section 32 of The Indian Contract Act, 1872 states that 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. Section 56 establishes the doctrine of frustration in which a contract to do an act which, after the contract is made, becomes impossible or unlawful or, by reason of some event which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.

In a contract there is always a provision of force majeure. The circumstances in which this clause is invoked is limited to the ‘Act of Gods’ and consideration between the parties. The three events that can be regarded as force majeure are as follows: 

  1. The contractual provision for force majeure expressly or impliedly mentions the event as an unforeseen circumstance 
  2. The contractual obligations are rendered incapable of being performed after the occurrence of the event, and
  3. If the parties have no control over the occurrence and continuance of the particular event. 

The term is an exhaustive one as there can be a list of events mentioned in the contract, for example it can include terms like ‘epidemic' 'lockdown' 'outbreak of disease' or 'pandemic'. But if there is no specific event mentioned , then the intension of the parties is taken into consideration. In the event of a dispute, the court will apply the principle of contractual interpretation. The party claiming ‘force majeure’ is usually under a duty to show that it has taken all reasonable steps to avoid or mitigate the event and its effects. The force majeure event or circumstance must be causative to the contractual breach and a party claiming force majeure is typically required to establish that it was an unforeseen event that caused the party to be unable to fulfil the contractual obligation. But, if the contract does not mention a force majeure clause, then the aggrieved party can claim relief under the doctrine of frustration which is under the section 56 of the Indian Contract Act, 1872. However, in order to claim that the contract is frustrated, it must be established that the performance of the contractual obligations has become impossible by reason of some event which is beyond the control of the human being. It is not enough to prove that the COVID-19 pandemic qualifies as a force majeure event, but more important for the party to prove that the pandemic has resulted in a lockdown by the government and that the contractual obligation is prevented, hindered or delayed from being performed . Furthermore, the difficulty to perform, higher cost of performance and the eventuality that the performance would make the contract less profitable are not enough reasons to declare a force majeure. However, the party claiming the COVID-19 pandemic as a force majeure event must show that it was physically or legally impossible to perform the contract. The pandemic is also affecting the purchasing and selling by an organisation. In such a situation, the purchasing organisation is to communicate with the supplier to take further necessary action. If the performance in whole or in part or any obligation under this contract is prevented or delayed by any reason of force majeure for a period exceeding 90 (ninety) days, either party may, at its option, have the right to terminate the contract without any financial repercussion on either side. Generally , contracts provide for the obligations of notice while claiming force majeure. In addition to the above, there may be obligations regarding duty to mitigate and/or providing regular updates. Before halting performance, a company should review the language of the contract, as there may be requirements for when and how to notify the other party/ies for a force majeure event. Contracting parties are taking effective measures to mitigate the impact of the pandemic by mutual understanding, and/or by re-negotiating the terms and conditions of the contract. Typically, a notice should mention the details of activities and obligation that have impacted the business. If the business is not entirely halted and some activities could be carried out, the notice must specifically mention details of such possible activities.

However, it is also true that the COVID-19 pandemic is exceptional and one of its kind, because it has affected almost every country and is likely to continue for a considerable time. Parties have therefore taken to the practice of issuing regular notices that detail the impact of the COVID-19 pandemic on their contractual obligations.