Force Majeure and its Scope During the Pandemic

Devisi Bhuwalka*

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Abstract

Covid-19 has caused an unprecedented time and many commercial transactions and business deals have seized or have faced certain form of obstacles. In these times, all parties resort to the clause of force majeure or fall back on the doctrine of frustration. This article focuses on the clause of Force Majeure and its scope during a pandemic. It highlights the wrong standard of interpretation of the clause in essential landmark cases. It also discusses the case that read out the proper interpretation of the clause. One can find a list of suggestions for the aggrieved parties and a brief of these provisions under the English Law.

Keywords

Force Majeure, Doctrine of Frustration, Covid-19

Introduction

As a pandemic hit the entire world, the government of India issued an Office Memorandum that clearly stated that Covid-19 is an extraordinary, unforeseen event. It does fall within the ambit of a natural calamity and force majeure can be invoked after analyzing the facts of each case.

According to the Black’s Law Dictionary, the term “Force Majeure” implies an unforeseen event that is out of human control. It provides temporary relief to the concerned parties and releases them from the obligation of carrying out the contract upon the occurrence of an unforeseen event or “Act of God”. It covers incidents such as wars, changes in government policies and rules, or natural calamities such as earthquakes, etc.

Difference Between Force Majeure and Doctrine of Frustration

Force Majeure is an essential element of most, commercial contracts, yet there is no explicit mention of this clause in the Indian Contract Act, 1872. However, Section 32 and 56 of the given act indirectly touches on Force Majeure and the Doctrine of Frustration, respectively. Even though these are closely related and almost overlap each other, it is essential to distinguish both. Force Majeure falls under the ambit of contingent contracts, where the parties have a right to include an exhaustive list of events in the contract before its execution, and upon the occurrence of the listed events, the contract can be rendered void. Whereas, the doctrine of frustration refers to the exemption of a party’s performance under a contract due to an unforeseen event that was not observed before the execution of a contract. In cases where a contract does not include a force majeure clause, the party can then resort to Section 56 where an act is “impossible” in its entirety and renders the contract void.

Discharge of a Contract

To understand the interpretation of the clauses, as mentioned above, by the Supreme Court and the High court and whether they have been interpreted similarly and correctly, it is essential to understand when does a contract become void and if they are subjected to any exceptions. For example, a contract is a void upon the destruction of the subject matter, death of a party, subsequent illegality, declaration of war after contract and non-occurrence of a particular state of things. The exception to such rules serves to be most important as it helps in determining whether the contract can be obligated to the clause of force majeure or not. The exceptions can be mere difficulty in the performance of the contract, commercial impossibility, strikes and lockouts, uneconomical performance or failure of any of the objects of the contract.

Incorrect Interpretation Laid Out by Supreme Court

The Supreme court gave a landmark judgment in the case of Satyabrata Ghose v. Mugneeram Bangur 1954 SCR 310 which held that,

“The performance of an act may not be literally ‘impossible’ but maybe impracticable and useless from the point of view of the object and purpose which the parties had in mind…the performance of a contract can be said to have become impossible if an untoward event or change of circumstances beyond the contemplation and control of the parties upsets the very foundation upon which the parties rested their bargain.”

● It laid down several astonishing principles such as the term “impossible” incorporated in Section 56 is not limited to physical or literal impossibility, contracts can be discharged if the directed performance leans towards impracticality in correspondence to the objectives of the contract and If the unforeseen event disrupts the very framework of the contract

The Supreme Court undertook a similar approach in the case of Energy Watchdog v. Central Electricity Regulatory Commission 2017 where it stated that the Parties can invoke the doctrine and be exempted from their obligation if it is proved that the performance of their contract would be impractical and hopeless, considering the purpose of the contract and Only upon the occurrence of an event listed in the contract can exempt the parties from carrying out their directed performance. However, to invoke the doctrine of force majeure, the performance must be objectively impossible. Mere difficulty or uneconomical performance cannot call for such reliefs. The impossibility needs to exist outside the control of either party. All reasonable steps have to be carried out before exhausting the contract and seeking relief under the clause of Force Majeure. The Bombay High Court recently took upon a case and gave a judgment that corrects the wrong interpretation of such provision. This serves to be essential, especially in times of a pandemic as discussed below.

Force Majeure’s Scope During Covid 19

● To parallelly observe the Bombay High Court ruling in the case of Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Ors. 2020, it is essential to understand the background of the case. The respondent being a supplier of steel products entered into a contract with the petitioner to supply a given amount. The former was successfully able to carry out their part of the contract, however, the petitioner claimed the clause of force majeure based on Covid-19 and claimed that they would be unable to pay for the goods purchased. The court dismissed the petition, and what inferred from the ruling was that firstly, lockdown due to Covid 19 is temporary and is just a mere difficulty. It cannot be used to invoke force majeure or the doctrine of frustration. It directly points at the exception pointed above and lastly, Force Majeure could have been invoked but only by the seller i.e., the respondent as there was a clause mentioned in the contract in their favour.

● This ruling not only sets out the right interpretation of the clause and the doctrine but also sets precedents for cases during a pandemic, in a sense, as it is natural that in the current situation, several parties would resort to these provisions. Therefore, to reiterate, the parties need to show that their non-performance is due to a reason outside their control. Covid 19 cannot be directly used as a way to invoke this relief without careful examination of all the facts of the case.

Recommendation for Aggrieved Parties During a Pandemic

It is important to keep in mind that pleading the doctrine of frustration or invoking the clause of Force Majeure is difficult as the courts would consider the pandemic as a mere hardship and it falls under the exceptions of both. Regardless, there are certain steps that a party should ensure to prove their claim under this provision such as maintaining all documents which touch the tangent of the impossibility of the performance or notices if any, noting the point of origin of the impossibility of the duty, examining all the terms of finance and insurance to analyze all the unforeseen losses, and ensuring that the pandemic infringes the objective of their contract and cause material adversity.

Force Majeure under Common Law

The English law has a rather narrower definition of the doctrine of frustration. . A ‘force Majeure clause is applied unless the parties’ resort to an alternative on their own. Similar to Indian law, if a contract lacks the force majeure clause, the party will have to take the aid of the doctrine of frustration in times of an event such as a pandemic or any other non- human-controlled event. Contracts can be discharged only if the performance of the objects of the contract becomes impossible to carry out, illegal or gives a different outcome than originally decided.

To conclude, the Doctrine of frustration and clause of Force Majeure is similar in all aspects over both jurisdictions.

Conclusion

The heavily relied on a clause of Force Majeure served to be problematic in the unprecedented Covid times. This is due to the fact the courts have been interpreting the provisions incorrectly. With the decision of the Bombay High Court, the provisions are aligned truthfully to its meaning. This means that all the parties post this rule would not get relief through these provisions and would have to resort to other alternatives or end up carrying out their obligations as directed in the contract.

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[*] Devisi Bhuwalka is an undergraduate student from Jindal Global Law School, India.

Preferred Citation – Devisi Bhuwalka, “Force Majeure and its Scope During the Pandemic", Syin & Sern Law Review, Published on 15th May 2021.