Force Majeure in times of COVID-19

By Admin Legal BitesPublished on 1 July 2020 4:45 AM IST

The horrendous wave of COVID 19 has reinvoked the use of Force Majeure as a way of dispensing justice. It has drowned the world into the sea of an unprecedented economic crisis, such that, it seems just next to impossible to recover from this slump. This pandemic has affected almost the entire globe by infecting over 50 lakh people… Read More »

The horrendous wave of COVID 19 has reinvoked the use of Force Majeure as a way of dispensing justice. It has drowned the world into the sea of an unprecedented economic crisis, such that, it seems just next to impossible to recover from this slump. This pandemic has affected almost the entire globe by infecting over 50 lakh people and causing over 3 lakh casualties. It has crippled the progress of every nation that is found to be in its firm grip; hence, it is counted as one of the greatest humanitarian disasters in the history of mankind.

Introduction

As the world is trapped in the Bermuda triangle of this virus, people worldwide are experiencing lockdown. This global confinement is having a very negative impact on both global and national supply chains, with commercial businesses coming to a complete standstill.

This situation has raised serious questions about the ability of parties to perform their respective obligations. It has forced parties to envisage breaches and consequently assess their obligations and rights. Due to the unforeseen circumstances carved out by COVID 19, many businesses are invoking force majeure clause.

The pandemic is causing a shortage of raw material, hitting consumption and impacting pre-agreed deadlines, which in turn is creating a situation where companies are exploring new ways like the invocation of clause of force majeure to cancel the existing contracts.

Force Majeure

Black’s Law Dictionary defines force majeure^[1]—French for “superior force”

as an event or an effect that can neither be anticipated nor controlled.

The term is commonly understood to encompass both acts of nature, such as floods and hurricanes, and acts of man, such as riots, strikes, and wars. Black’s Law Dictionary further defines force majeure clauses as contractual provisions that address circumstances in which contractual performance becomes impracticable due to events that are unforeseen, and not within the party’s control.

I. Origin

The concept of force majeure originated in England in the 1860s. This term was used for the first time in the case of Taylor v. Caldwell^[2].

^[3]In Taylor v. Caldwell, an English court arrived at a decision that circumstances beyond the control or fault (responsibility) of two contracting parties excused performance under their contract. An event organizer had contracted with a venue owner to rent a music hall and gardens for four days in the summer of 1861.

The event organizer agreed to pay the venue operator a definite sum of money on the day of each event. However, before the commencement of the first event, an accidental fire destroyed the music hall. There was no clause to govern such a situation. Nevertheless, the court interpreted that the contract was to permit the organizer to use the music hall. Without the music hall, the contract was frustrated.

Reviewing prior English cases, the court summarized the rule of law as follows:-

In contracts where performance depends on the continued existence of a given person or a thing, a condition is implied that the impossibility of performance arising from the perishing of that person or thing shall excuse the performance.

Without the concert hall, the performance of both parties was excused. 20 years later this concept was adopted by the Supreme Court of America in a case named THE TORNADO. In this case, the owner of the ship named Tornado was to deliver some freight to the recipient. But before starting the voyage the ship caught fire and was declared unseaworthy.

However, there was no clause to govern this situation. It was written in the contract specifics that the goods must be delivered by the Tornado. Hence, the contract was affirmed frustrated and the Supreme Court adopted the same rule as what was adopted in Taylor that suggested that if anywhere the agreement of two contracting parties contemplates a specific set of circumstances that can no longer be performed, both parties shall be excused from their performance.

French Civil Code Art 1218^[4] defines Force Majeure event as

“[i]n contractual matters, there is force majeure where an event beyond the control of the debtor, which could not reasonably have been foreseen at the time of the conclusion of the contract and whose effects could not be avoided by appropriate measures, prevents performance of his obligation by the debtor”

The aggrieved party is required to prove the following four conditions for the force majeure defence to be granted:-

Externality: Occurrence of an external event for which the parties have not assumed the risk.
Unavoidability/Irresistibility: Occurrence of the external event was beyond the party’s control.
Unforseeability: The event and its consequences, i.e. the event’s adverse impact on the party’s ability to perform, could not have been reasonably avoided or overcame mitigation, e.g. by alternative and commercially reasonable modes of performance.

Causation: The party’s non-performance was, as a “matter of commercial reality” caused by the external event and not by the party’s own fault.

II. The Indian Contract Act

In the Indian Contract Act, the concept of force majeure is embodied in Section 32 and Section 56.

Sec 32 deals with the contingent contracts and inter alia provides that if a contract is based on happening of a future event and such event becomes impossible the contracts become void. Sec. 56 deals with the frustration of the contract. It states or authorizes that if the execution of the contract becomes impossible due to an unforeseen event that is beyond the control of the parties involved, then the contract shall be null and void.

The typical buildup of Force Majeure clause:-

A force majeure clause is usually negotiated between the parties and specifies an exhaustive list of events that qualify as force majeure including events such as acts of God, war, terrorism, earthquakes, hurricanes, acts of government, explosions, fire, plagues, epidemics or a non-exhaustive list with a catch-all phase. A catch-all phrase has wording like “including but not limited to” etc.

In a situation where the word ‘epidemic’ is not mentioned rather a catch-all statement is present, it could be argued if epidemic/pandemic like COVID-19 should be taken to fall within the ambit of force majeure clause or not.

III. A Force Majeure Clause Be Implied Under the Contract?

A force majeure clause cannot be implied under Indian law. It must be expressly provided for, under the contract and protection afforded will depend on the language of the clause.

Does a pandemic like COVID-19 come under the Act of God?

Black’s Law Dictionary^[5] defines an Act of God as,

“an overwhelming, unpreventable event caused exclusively by forces of nature, such as earthquakes, floods, or tornados.”

Initial reports in regard to this pandemic suggested that this situation has arisen due to unavoidable natural causes that were beyond the scope of human control. Hence, COVID-19 can be considered as an act of God.

Judicature of various countries like that of UK, France, and America have on various occasions considered epidemics or pandemics as an act of God such as in the case-law of Lakeman v. Pollard^[6], an outbreak of cholera was considered as an Act of God. Similarly, the Supreme Court of North Dakota in the case-law of Sandry v. Brooklyn School District^[7] regarded the spread of influenza to be an act of God.

However, a counter-argument with respect to the ongoing pandemic concludes that the nonperformance of a contractual obligation is largely the result of restrictions imposed by the government as a necessary precaution to curb the spread of this virus rather than the result of this outbreak itself.

Thus, human intervention to control the outbreak may not constitute an Act of God. Apart from this, COVID-19 may also not be considered an act of God because the spread of a global virus, or some variation thereof, was foreseeable in light of the recent global health events, such as SARS, H1N1, and Zika Virus, and therefore should have been addressed in the contract.

Thus, it can be rightly concluded that the decision to ascertain this pandemic as an Act of God or not should be determined by the language of the clause and the facts presented in the case.

IV. Can force majeure clause be invoked due to mere difficulty in price increase and are parties required to mitigate the loss?

A straight answer to this question is “NO”. Force Majeure clause cannot be invoked just because a party is facing losses in fulfilling the contractual obligations.

The existence of the force majeure clause in a contract does not mean that parties are free from the contractual obligations. The force majeure event must have a direct relation with the non-performance of the party and the other party relying on the defence of the force majeure event is also responsible to mitigate the losses and also seek alternate measures for the performance of the contract.

In the case of Tsakiroglou & Co Ltd v. Noblee Thorl GmbH^[8], a shipowner claimed frustration just because he was unable to use the Suez Canal which is the shortest viable route to deliver goods as it was closed. The House of Lords didn’t accept his argument for he had an alternative way to fulfil the contractual obligation by using the route of Cape of Good Hope.

In this situation, the court decided that if there is an alternative means to perform the contractual obligations, it should be adopted rather than considering the contract frustrated. (might be onerous and loss-making to the party but the contractual obligation must be performed.)

In Energy Watchdog v. CERC & Ors,^[9] a judgment of the same kind was adopted, where Adani Power’s claim of force majeure was dismissed by the Supreme Court by giving the following reasoning:

The fundamental basis of the contract was not changed by the rise in the price of coal in Indonesia.
Alternative modes of performance, however, were more expensive but were easily available. There was no mention in the contract that envisaged procurement of coal only from Indonesia.
Mere commercial onerousness of the Contract does not amount to ‘frustration’. The court adjudged that there is a risk that parties undertake while entering the contract. The Court also cancelled the compensatory traffics which were awarded by the central commission.

As regards the plea of ‘force majeure’ the Court held that ‘rise in the price of fuel’ cannot be regarded as a force majeure event.

In conclusion, the court stated,

The term force majeure refers to a situation where the parties involved are completely restrained from performing the contract due to factors beyond their control. Even if an event makes a contract economically unviable or the cost of fulfilling the obligation increases manifold yet the contract does not qualify as a force majeure event.

V. How long is the duration of the Force Majeure event?

According to the provisions of Article 1218 paragraph 2 of the French Civil Code

“If the impediment is temporary, the performance of the obligation is suspended unless the resulting delay justifies termination of the contract. If the impediment is definitive, the contract is automatically terminated and the parties are discharged from their obligations”.

In 2003, Hong Kong court delivered a judgment in the case of Li Ching Wing v. Xuan Yi Xiong^[10], where, as a result of the outbreak of SARS in the estate within which the tenant resided, the tenant was subjected to a mandatory 10 day isolation period. The tenant attempted to rely on the doctrine of frustration to terminate the lease.

However, the Court rejected the tenant’s argument and explained that isolation for just 10 days of a two-year lease was insignificant. Although the Court acknowledged that it was at least arguable that SARS was an unforeseen event, such an event in the present circumstance did not in the opinion of the Court “significantly change the nature of the outstanding contractual rights or obligations from what the parties could reasonably have contemplated at the time of execution of the tenancy agreement

Thus, the duration of time for which the force majeure event impacts the party plays a major role in deciding whether the force majeure clause can be invoked or not.

Conclusion

Delhi High Court in case of M/S Halliburton Offshore Services Inc v. Vedanta Limited & ANR^[11] observed:-

“The question as to whether COVID-19 would justify nonperformance of a contract has to be examined on the facts and circumstances of each case. Every breach or nonperformance cannot be justified or excused merely on the invocation of COVID-19 as a Force Majeure condition. The court would have to assess the conduct of the parties prior to the outbreak, the deadlines that were imposed in the contract, the steps that were to be taken, the various compliances that were required to be made and only then assess as to whether, genuinely, a party was prevented or is able to justify its non-performance due to epidemic/pandemic.”

“It is settled position in law that a force majeure clause is to be interpreted narrowly and not broadly. Parties ought to be compelled to adhere to contractual terms and conditions and excusing non-performance would only be in exceptional situations.”

Authored by: Hemant Marwah & Varenium

Students, Law Centre-I, Faculty of Law, University of Delhi

References

[1] Black’s Law Dictionary

[2] 122 ER 309

[3] (Origins of the Force Majeure Clause and Impossibility of Contractual Performance Defense | Lexology, 2020)

[4] Berger, K., 2020. French Civil Code 2016 | Trans-Lex.Org. [online] Trans-lex.org.

[5] Black’s Law Dictionary

[6] Lakeman v. Pollard, 43 Me. 463, 466 (1857)

[7] 182 NW 689

[8] [1961] 2 All ER 179

[9] Chugh, B., 2020. Case Comment On Supreme Court’s Latest Judgment On Frustration And ‘Force Majeure’ In Energy Watchdog v. CERC & Ors (2017 SC). [online] Rahul’s IAS – The Official Blog

[10] Li Ching Wing v. Xuan Yi Xiong [2004] 1 HKLRD 754

[11] O.M.P. (I) (COMM) & I.A. 3697/2020