FORCE MAJEURE CLAUSE IN TIMES OF COVID-19
The worldwide outbreak of the novel coronavirus (Covid-19) has caused disturbances in business and commercial operations throughout the world including Jammu & Kashmir. It has become difficult to satisfy contractual commitments due to quarantines, lockdowns and work-terminations & closures. This pandemic has not just resulted in loss of lives but has led to financial slowdown to an already dented economy of valley by over Rs. 8416 crores (approx). Due to the present circumstances in J&K, the only legal remedy available to the parties to contracts, tenders and financial or bank transactions is to invoke the force majeure provisions in order to be acquitted from penalties that may accrue due to missed or late deliveries, cutoff times being surpassed, untimely or non-payments and so on, as a result of the Covid-19, lockdown and resultant employee shortages, disruptions in supply chains and cash flow problems for organizations in all divisions be it banks, private or government offices, or local businesses.
The Indian Contract Act, 1872 prescribes the law relating to contracts and was applicable to all the states of India except the state of Jammu and Kashmir. The Contract Act of Jammu and Kashmir, 1977 was applicable in J&K instead of the Indian Contract Act, 1872. However, after the extension of J&K Reorganization Act, 2019 which abrogated Article 370 and 35A of the Constitution of India, around 106 central laws including the Indian Contract Act, 1872 will be applicable retrospectively from October 31, 2019 in the UT of J&K. The Indian Contract Act, 1872 and the Contract Act of Jammu and Kashmir, 1977 are identical as far as the laws dealing with the Force Majeure are concerned.
Force Majeure is a French term that literally translates to “superior force”. Typical force majeure events may include fire, natural disasters, wars, flood, civil unrest, or terrorist attack. The purpose of a force majeure clause is to allocate risk and put the parties on notice of events that may suspend or excuse service. “Force Majeure” or the “Act of God” clause is governed by Chapter III of both the Indian Contract Act, 1872 and the Contract Act of Jammu and Kashmir, 1977 dealing with the contingent contracts, and more particularly, Section 32 thereof of both the acts. In so far as a force majeure event occurs without a clause being included in the contract, it is dealt with by a rule of positive law under Section 56 of both the Indian Contract Act, 1872 and the Contract Act of Jammu and Kashmir, 1977.
· Section 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. If the event becomes impossible, such contracts become void.”
· The doctrine of frustration “Section 56: Agreement to do impossible act - 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 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.
- 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 promise for any loss which such promisee sustains through the non-performance of the promise.”
The doctrine of frustration is a common law principle whereas the force majeure is a civil law concept that has no settled meaning in the common law. It must be expressly referred to and characterized in a contract.
On February 19, 2020, the Indian Government issued Office Memorandum, stating that covid-19 shall be considered as natural calamity and force majeure clause may be invoked wherever necessary. The Ministry of New & Renewable Energy vide Office Memorandum bearing no. F. No. 283/18/2020-GRID SOLAR dated April 17, 2020 again termed the occurrence of Covid-19 as a Force Majeure Event. The Ministry of New & Renewable Energy vide Office Memorandum bearing no. F. No. 283/18/2020-GRID SOLAR dated April 17, 2020 has reiterated the occurrence of Covid-19 as a Force Majeure Event.
The Supreme Court has earlier clarified that economic hardship cannot be considered as a force majeure event. Covid-19 would be covered under the terms epidemic, pandemic or even natural calamity, in a force majeure clause. The pandemic/ lockdown cannot be said to be a force majeure event, if the parties are able to somehow continue operations, either digitally or partially and there is an extended time within which they can complete their obligations, post the lockdowns in the city/country. Therefore, calling the pandemic or lockdown a force majeure event can be incorrect depending on the contractual obligations and ways to perform the same and thus, may lead to disputes between contracting parties
In R.B. Jodhamal vs State and Ors (J&K High Court) 2004, the Hon'ble Court held that the plea of the petitioner for extension of working period is untenable, firstly for the reason that time was essence of the supplementary agreement and non-execution of the contract on his part cannot be excused because of force majeure as the agreement entered into between him and the Government does not envisage the effect of force majeure and secondly there being no clause in the supplementary agreement stipulating for extension of the working period of the lease, the lessee had no right to ask for extension of time.
Hotel Corporation of India runs and operates hotels throughout India, one of which is the Centaur Lake View Hotel (“hotel”) at Srinagar in the UT of Jammu and Kashmir. In another matter i.e. Hotel Corporation of India vs. BD & P Hotels (India) Pvt. Ltd., the learned arbitrator held that force majeure was not attracted because there was no order, at any rate, against the management company, i.e. the respondent herein, and that was not even the case of the Petitioner. Force Majeure was also not attracted, since there was no action of any government agency having any jurisdiction over performance of management services or obligations of the management company under the management contract.
In the landmark case of Satyabrata Ghose v. Mugneeram, Justice Mukherjea in his judgement held that the Indian Law of frustration which term is interchangeable with supervening impossibility is embodied in Section 56 of Indian Contract Act, 1872 as a positive rule of law which does not leave the matter to the intention of the parties and casts the duty on the court to decide whether the contract is ended by frustration. Section 56 of the Indian Contract Act, 1872 lays down rule of positive law, not dependent on the intention of the parties but only evidence, and the court has to form its own conclusion by examining the contract and the circumstances; and
Force majeure and the doctrine of frustration has explained by Justice RF Nariman in the case Energy Watchdog vs CERC (2017). As per the judgement, when the contract contains an express or implied term according to which the performance of the contract would stand discharged in certain circumstances (force majeure clause), the dissolution of the contract would take place under the terms of the contract itself and it shall be covered under Section 32 of the Indian Contract Act, 1872. When the contract does not contain a clause as referred to in point i) above, frustration of the contract shall take place de hors the contract and shall be governed by Section 56 of the Indian Contract Act, 1872. The word "impossible" has not been used in Section 56 in the sense of physical or literal impossibility. The performance of act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties.
In view of the investigation of the aforesaid judicial precedents and legal points of reference, it is clear that the judicial response to the doctrine of force majeure has been inflexible. The courts have not permitted economic inability, inconvenience, trouble in execution or performance, onerousness and so on as grounds of force majeure for a party to terminate or get exemption from a contract. The methodology adopted by Courts on force majeure proposes that there are no fixed principles with respect to the applicability of the concept of force majeure to save a party from the performance of contracts. The Courts examine the issue dependent on the reality and facts of each case and the relief is thus granted to parties accordingly. Therefore, parties should turn away from attempting to demonstrate frustration in a case where performance is otherwise possible. The following are the pertinent points which need to be taken into consideration in order to access and analyze whether force majeure clause is attracted or not: a) Whether a contract contains force majeure clause or not? b) If the contract contains Force Majeure clause, Section 32 of the Indian Contract Act, 1872 is attracted. c) If the contract does not contain Force Majeure clause, Section 56 of the Indian Contract Act, 1872 is attracted. d) Mere difficulty or inconvenience of a party is not force majeure.
SUGGESTIONS: The party sending out notice should retain evidence, i.e. the supporting documents with regard to the impossibility of performance, delay or notices served, if any. Notice must be served expeditiously indicating that the agreement has gotten difficult to perform or that a force majeure occasion has occurred. The parties ‘receiving’ notices of force majeure, it is necessary for them to ascertain whether such notice holds consistency with the protections provided by the clause, if due process has been followed and whether supporting documents are available.
The Authors Viqas Malik and Romaan Muneeb are Lawyers at the J&K High Court and Partners at “Malik and Romaan Law offices, Srinagar”. The Authors can be reached at firstname.lastname@example.org