By Dr. Anup P. Shah
Chartered Accountant
INTRODUCTION
Force majeure is a French
term which, at some point or other, we have all come across when reading a
contract. It is a small, solitary clause lurking somewhere at the end which has
the effect of discharging all the parties from their obligations under the
contract! What does this clause actually mean and how does one interpret it in
the light of the present pandemic? Would a contract hit by non-performance due
to Covid-19 fall under the force majeure scenario? Let us
try and answer some of these questions.
MEANING
The Black’s
Law Dictionary, 6th edition, defines the term force majeure
as ‘An event or effect that can be neither anticipated nor controlled.’ The
events of force majeure could be acts of God such as earthquakes,
floods, famine, other natural disasters and manmade occurrences such as wars,
bandhs, blackouts, sabotage, fire, arson, riots, strikes, theft, etc. Even
major changes in government regulations could be a part of this clause. In
short, any act that was outside the realm of contemplation at the time when the
contract was executed but which now has manifested and has had a major impact
on the contract. It is necessary that such acts should not be committed
voluntarily by either party, i.e., they are out of the control of the parties
which are rendered mere spectators to the consequences. For example, a sample force
majeure clause found in a real estate development contract could be as
follows:
‘The
obligations undertaken by the parties hereto under this Agreement shall be
subject to the force majeure conditions, i.e., (i) non-availability of
steel, cement and other building material (which may be under Government
Control), water and electric supply, (ii) war, civil commotion, strike, civil
unrest, riots, arson, acts of God such as earthquake, tsunami, storm, floods,
cyclone, fire, etc., (iii) any notice, order, rule, notification of the
Government and / or other public or competent authority, (iv) any other
condition / reason beyond the control of the Developer.’
INDIAN CONTRACT LAW
The Indian Contract Act, 1872
governs the law relating to contracts in India. The edifice of almost all
contracts and agreements lies in this Contract Law. In the event that a
contract does not explicitly provide for a force majeure clause, then
section 56 of the Act steps in. This section deals with the frustration
of contracts. The consequences of a force majeure event
are provided for u/s 56 of the Act which states that on the occurrence of an
event which renders the performance impossible, the contract becomes void
thereafter. A contract to do an act which, after the contract is made, becomes
impossible or, by reason of some event which the promisor could not prevent,
becomes unlawful is treated as void when the act becomes impossible or
unlawful. Thus, if the parties or one of the parties to the contract is
prevented from carrying out his obligation under the contract, then the
contract is said to be frustrated.
When the act
contracted for becomes impossible, then u/s 56 the parties are exempted from
further performance and the contract becomes void. The Supreme Court in Satyabrata
Ghose vs. Mugneeram Bangur & Co., AIR 1954 SC 44 has held that a
change in event or circumstance which is so fundamental as to strike at the
very root of the contract as a whole, would be regarded as frustrating the
contract. It held:
‘In deciding
cases in India the only doctrine that we have to go by is that of supervening
impossibility or illegality as laid down in section 56 of the Contract Act,
taking the word “impossible” in its practical and not literal sense. It must be
borne in mind, however, that section 56 lays down a rule of positive law and
does not leave the matter to be determined according to the intention of the
parties.’
The Supreme
Court went on to hold that if and when there is frustration, the dissolution of
the contract occurs automatically. It does not depend on the choice or election
of either party. What happens generally in such cases is that one party claims
that the contract has been frustrated while the other party denies it. The
issue has got to be decided by the courts on the actual facts and circumstances
of the case.
The Supreme Court has, in South East Asia Marine Engineering and
Constructions Ltd. (SEAMEC Ltd.) vs. Oil India Ltd., CA No. 673/2012, order
dated 11th May, 2020, clarified that the parties may instead
choose the consequences that would flow on the occurrence of an uncertain
future event u/s 32 of the Contract Act. This section provides that contingent
contracts to do or not to do anything if an uncertain future event occurs,
cannot be enforced by law unless and until that event has occurred. If the
event becomes impossible, such contracts become void.
The English
Common Law has also dealt with several such cases. The consequence of such
frustration had fallen on the party that sustained a loss before the
frustrating event. For example, in Chandler vs. Webster, [1904] 1 KB 493,
one Mr. Chandler rented space from a Mr. Webster for viewing the coronation
procession of King Edward VII. Mr. Chandler had paid part consideration for the
same. However, due to the King falling ill, the coronation was postponed. Mr.
Webster insisted on payment of his consideration. The Court of Appeals rejected
the claims of both Mr. Chandler as well as Mr. Webster. The essence of the
ruling was that once frustration of a contract took place, there could not
be any enforcement and the loss fell on the person who sustained it before the force
majeure event occurred.
The above
Common Law doctrine has been modified in India. The Supreme Court in the SEAMEC
case (Supra) has held that in India the Contract Act had already
recognised the harsh consequences of such frustration to some extent and had
provided for a limited mechanism to improve the same u/s 65 of the Contract
Act. Section 65 provides for the obligation of any person who has received
advantage under a void agreement or a contract that becomes void. It states
that when a contract becomes void, any person who has received any advantage
under such agreement or contract is bound to restore it, or to make
compensation for it to the person from whom he received it. Under Indian
contract law, the effect of the doctrine of frustration is that it discharges
all the parties from future obligations.
For example,
a convention was scheduled to be held in a banquet hall. The city goes into
lockdown due to Covid and all movement of people comes to a halt and the
convention has to be cancelled. Any advance paid to the banquet hall for this
purpose would have to be refunded by the hall owners. In this respect, the
Supreme Court in Satyabratha’s case has held that if the parties
to a contract do contemplate the possibility of an intervening circumstance
which might affect the performance of the contract but expressly stipulate that
the contract would stand despite such circumstances, then there can be no case
of frustration because the basis of the contract being to demand performance
despite the occurrence of a particular event, performance cannot disappear when
that event takes place.
COVID-19 AS A ‘FORCE MAJEURE’
Is Covid-19
an Act of God; is a typical force majeure clause wide enough to
include a lockdown as a result of Covid-19? These are some of the questions
which our courts would grapple with in the months to come. However, some Indian
companies have started invoking Covid and the related lockdown as a force
majeure clause. For example, Adani Ports and SEZ Ltd., in
a notice to the trade dated 24th March, 2020, has stated that in
view of the Covid-19 pandemic the Mundra Port has notified a ‘force
majeure event’. Accordingly, it will not be responsible for any claims,
damages, charges, etc., whatsoever arising out of and / or connected to the
above force majeure event, either directly or indirectly. This
would include vessel demurrage due, inter alia, to pre-berthing or any
other delays of whatsoever nature and, accordingly, the discharge rate
guaranteed under the agreement shall also not be applicable for all vessels to
be handled at the port for any delay or disturbance in the port services during
the force majeure period.
CONCLUSION
Indian businesses would have to take a deep look at their contracts and
determine whether there is a force majeure clause and, if yes,
what are its ramifications. In cases where there is no such clause, they should
consider taking shelter u/s 56 of the Indian Contract Act. This is one area
where they could renegotiate and, if required, even litigate or go in for arbitration.
It would be very interesting to see how Indian Courts interpret the issue of
Covid acting as a force majeure clause. However, it must be
remembered that force majeure cannot be invoked at the mere drop
of a hat. The facts and circumstances must actually prove that it was
impossible to carry out the contract. What steps did the parties take to meet
this uncertain event would also carry heft with the Courts in deciding whether
or not to excuse performance of the contract.
