Vipul Ganda Advocate | Force Majeure, et al –Is it a Cogent Line of Defence?

1. Force Majeure, et al –Is it a Cogent Line of Defence? Broadly, the doctrine of ‘force majeure’ is applied to a situation where it becomes impossible for a party to undertake its promises or contractual obligations in the wake of prohibitive circumstances. The COVID-19 pandemic has triggered many discussions in the context of Force Majeure. The provisions pertaining to frustration of contract are contained in sections 32 and 56 of the Indian Contract Act, 1872, albeit with distinct perspectives, which has evolved over a period of time in the context of the doctrine of force majeure. Courts in India have applied a very high standard in relation to frustration of contract on account of occurrence of a force majeure event. This article discusses the doctrine of force majeure in light of judicial pronouncements, where the doctrine has been tested and applied to determine whether there are valid grounds to declare frustration of a contract, and thus, void, on account of ‘Force Majeure’ BACKGROUND Colloquially, we have come across the phrase ‘force majeure’ or ‘act of god’, most times interchangeably, and more so, after release of the Hindi motion picture Oh My Go Due to the rapid spread of the novel coronavirus disease (COVID-19), India was forced to go into a nationwide lockdown on March 25, 2020 resulting in suspension of most of its economic activities. This situation which was indeed unforeseen has considerably impacted the economy.

2. Whilst, it appears that the economy and commerce would bear the impact of COVID-19 crisis for a significant period, the community at large is faced with myriad of questions and thoughts in their minds in relation to their contractual obligations - whether such obligations are enforceable against the so called ‘promisor’, whether I am entitled to a relaxation in performance of my obligation to pay under a contract, whether rent for the period of the lockdown payable, etc., on account of ‘force majeure’, etc. The concept of ‘force majeure’ is an import of the French civil law system, which means ‘superior force’ in English. In common parlance, it denotes an event or effect that can neither be reasonably anticipated nor controlled, or an unexpected event that prevents someone from doing or completing something that he or she had agreed or planned to do. Even though ‘force majeure’ is, generally, understood to encompass both natural and human-initiated events, very often a distinction has been drawn between ‘force majeure’ and ‘act of God’. The latter phrase can roughly be understood to be a subset of the former. As per Black’s Law Dictionary, ‘act of god’ would include an overwhelming, unpreventable event caused exclusively by forces of nature, and exclude an event where human agency, by act or negligence, had a part to play. FORCE MAJEURE IN INDIA Broadly, the doctrine of ‘force majeure’ is applied to a situation where it becomes impossible for a party to undertake its legal obligation in the wake of unavoidable circumstances. The application of the doctrine of force majeure would normally entail frustration of contract, leading to the contract being declared as void. The doctrine of frustration is an aspect of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The English law on the doctrine of frustration contemplates interruption of such a character and duration that it vitally and fundamentally changes the conditions for performance of the contract, and could not possibly have been in the contemplation of the parties to the contract when it was made. In terms of the judicial precedents in India, over a period of time, the doctrine of force majeure must be applied only in such situations where the force majeure event is of such a prohibitive gravity as to prevent the promisor from performance of its obligations under the contract. The test, therefore, is not just the occurrence of a force majeure event but also whether such force majeure event leads to a prohibition on performance of the contract. Broadly speaking, in this context, there are two kinds of contracts which may be required to be construed, interpreted or adjudicated in the context of frustration of contract due to a ‘force majeure’ event. One, a contract which sets out a clause dealing with force majeure events and consequences on occurrence thereof, and the other, which does not set out any provision in relation to a force majeure event and consequences on occurrence thereof. Whilst, the doctrine of force majeure does not specifically find mention in the Indian statute, the concept of frustration of contract, under common law, has been encapsulated in Sections 32 and 56 of the Indian Contract Act, 1872 (“Contract Act”).

3. The judicial pronouncements in India, and the bare Sections 32 and 56 of the Contract Act, create a distinction in applicability of the two provisions, in as much as, Section 32 would apply in relation to a contract which contains provisions pertaining to occurrence of force majeure events, and Section 56 would apply to contracts which do not contain provisions pertaining to force majeure events. Where the contract itself either implicitly or expressly contains a term, according to which performance would stand discharged in certain circumstances, the dissolution of the contract would take place under the terms of the contract itself, and such cases are required to be dealt with under Section 32 of the Contract Act. However, if the frustration is to take place dehors the contract, it would be governed by Section 56 of the Contract Act. In case of the former, courts would be limited to only interpreting the provisions of the contract, rather than going beyond the provisions of the contract and rewriting the contract. Courts in India have applied a very high standard in relation to frustration of contract. In cases where an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered into an agreement, it has been held that the promisor finds it impossible to do the act which he had promised to do. Further, merely because the circumstances in which a contract was made have altered the contract would not be considered to have frustrated the contract. The courts would, generally, not absolve a party from the performance of a contract merely because its performance has become onerous on account of unforeseen turn of events. Natural calamity, directly or substantially affecting the performance of obligations, and judicial order preventing a party from performing its obligations under a contract, are certain basic illustrations, where courts have applied the doctrine of force majeure to declare that the contract stands frustrated. The courts would, therefore, be required to infer from the nature of the contract and the surrounding circumstances that a condition which is not expressed in the contract was the foundation upon which the parties contracted. The doctrine of frustration would require a multi - factorial approach. Among the factors, ones which ought to be considered are: the terms of the contract itself, its matrix or context; the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed to mutually and objectively; the nature of the supervening event; and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of the future performance in the circumstance. "Courts in India have applied a very high standard in relation to frustration of contract. In cases where an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered into an agreement, it has been held that the promisor finds it impossible to do the act which he had promised to do. Further, merely because the circumstances in which a contract was made have altered the contract would not be considered to have frustrated the contract"

4. THE PANDEMIC With the substantial restriction on commercial activities to varying extent during different phases of the lockdown, it is inevitable that performance of contractual obligations (including payments of rent) would have been hampered. Various circulars issued by the departments within the Government have indicated that disruption in the supply chains caused by the spread of coronavirus disease in China and elsewhere should be considered as a natural calamity and the doctrine of force majeure should be invoked, wherever appropriate. The executive orders would, perhaps, be subjected to judicial review before the constitutional courts of India. However, keeping in view the peculiar circumstances and public health and safety, normally, the courts are unlikely to interfere with them. It would be imperative for the courts to peruse the contract as a whole, in order to determine if the obligations under the contract, required to be performed, were of such nature as are prohibited in terms of the various executive orders / circulars. In case the same were permitted, the restrictions or lockdown due to coronavirus disease are unlikely to weigh in positively with the courts. However, if the activities at the core of a commercial contract were prohibited, the doctrine of force majeure would be required have to be applied. The Hon’ble High Court of Delhi, on April 20, 2020, in Halliburton Offshore Services Inc. v. Vedanta Ltd. and another passed an order imposing ad interim temporary injunction against Vedanta Limited from invoking bank guarantees issued in its favour by M/s Halliburton Offshore Services Incorporation. Due to the unprecedented order of nationwide lockdown, the Petitioner could not complete its work by March 31, 2020 as the work of drilling three oilfields of the Respondent required mobilization of labour and other personnel, within and outside India. The Respondent opposed the grant of the temporary injunction that invocation of bank guarantee could be stayed only on ground of egregious fraud. It was also the case of the Respondent that petroleum being an essential commodity the production thereof was exempted from the rigors of lockdown. The Bench arrived at the conclusion that besides egregious fraud, invocation of bank guarantee could also be stayed under special equities or special circumstances and the petitioner being involved only in drilling of the wells and not in direct production of petroleum was subjected to the restrictions of the lockdown. The Bench also, prima facie, viewed the nationwide lockdown as a force majeure event. Accordingly, an ad interim injunction restraining or encashment of the bank guarantees was passed. However, in the final judgment of the case, dated May 29, 2020, the Hon’ble Court arrived at the conclusion that the Petitioner had breached the existing agreement between the Petitioner and the Respondent in September, 2019 itself, well before the COVID-19 pandemic and the lockdown set in afterwards. Hence, the Petitioner could not take recourse of a force majeure event, and accordingly, the ad-interim injunction passed on April 20, 2020 (as modified on April 24, 2020) stood vacated.

5. On the other side of the spectrum, the case of Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & others stands out. This case was decided by the Hon’ble High Court of Bombay on April 8, 2020. The Petitioner in this case submitted that in view of the lockdown, the contract between the Petitioner and the Respondent for supply of steel by the latter to the former from Korea, stood frustrated under Section 56 of the Indian Contract Act, 1872. However, the ad-interim prayers of the Petitioner stood rejected because the Respondent had already dispatched the steel to India from south Korea and distribution of steel had been declared an essential service and there was no restriction on movement thereof to India and within the territory as well. Further, in cases dealing with contractual relationship between a tenant and a landlord, the Hon’ble High Court of Delhi on May 21, 2020, in Ramanand & Others v. Dr. Girish Soni & another, while analysing Sections 32 and 56 of the Contract Act and Section 108 (B) of the Transfer of Property Act, 1882 held that a relationship between such parties can be governed either by contract or by law. The manner in which the rights and obligations of the parties amidst pandemics, such as COVID-19 can play out in the realm of contracts, would be determined by the terms and conditions of the contract itself. Therefore, where no written agreement exists between a landlord or tenant, it would be required to be established that the lockdown was a force majeure event of such permanent and prohibitive nature, bearing in mind various factors which have been highlighted here, which prevented the tenant to perform his end of the obligation i.e. to make payment to the landlord. Additionally, it would be worthwhile to consider that the banks were functioning even during the lockdown, therefore, allowing making of payment through banking channels Whilst, the law of the doctrine of force majeure, in the context of frustration of contract, in relation to the executive orders issued by the Government to control the spread of COVID – 19 pandemic, is yet to evolve, the courts and the arbitral tribunals would be required to decide each case in light of the peculiar circumstances and facts. Setting the tone, the Hon’ble High Court of Delhi had the opportunity to consider the nature of the advisories issued by the Ministry of Shipping regarding charging of ground rent, detention charges etc. It has been observed and clarified by the Hon’ble Court that such advisories are by no extent directory or mandatory in nature. They have been issued only to advise the port authorities to adopt a sympathetic and humanitarian approach. Relying on few of the above-mentioned cases, a Single Judge Bench of the Hon’ble Delhi High Court, in the matter of Rashmi Cement Ltd. vs. World Metals and Alloys (FZC) & Anr. refused to grant an interlocutory relief to the Petitioner in a petition under Section 9 of the Arbitration and Conciliation Act, 1996. Whilst, the Petitioner in the given case sought to rely upon a contractual force majeure clause to recuse from its liability to pay demurrage, the Ld. Single Judge held that whether the force majeure clause could be invoked, and consequently, whether demurrage was required to be paid or not is required to be decided in the arbitration proceeding, the same could not be decided by the Court under the scope of examination of Section 9. It was also observed, that a force majeure clause could not be invoked merely upon request of one of the parties to a contract and the same ought to be decided in light of the facts and circumstances of each case.

6. " Whilst, the law of the doctrine of force majeure, in the context of frustration of contract, in relation to the executive orders issued by the Government to control the spread of COVID – 19 pandemic, is yet to evolve, the courts and the arbitral tribunals would be required to decide each case in light of the peculiar circumstances and facts." In a similar context, a co-ordinate bench of the same court has held that a force majeure clause comes into effect when it has been acknowledged by the other contracting party. In such a case, the need to explicitly invoke the force majeure clause does not arise. As the consequence of application of the doctrine of force majeure, i.e. frustration of contract, is draconian, keeping in mind the peculiar facts and circumstances of each case, the Court would be, inter alia, required to examine, whether: 1.the terms of the contract itself, its matrix or context; 2.the contract itself contains provisions pertaining to consequences, upon occurrence of a force majeure event; 3.the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed to mutually and objectively; 4.the executive orders issued by the Government, imposing the lockdown, were of such prohibitive nature, so as to prevent the promisor from performing its obligations under the contract, or making them impossible to perform; 5.the period for performance of the contract, and whether, the contract was to be performed and determined during the time when such restrictions were in place or whether such restrictions came to be in force, for a certain intervening period, during the course of the performance of the contract; 6.the impact is such, so as to permanently or for a significant period of time, prevent the promisor to perform its obligations under the contact; and 7.the parties’ reasonable and objectively ascertainable calculations as to the possibilities of the future performance in the circumstances. Potentially, it is possible, in multiple cases, for the contract to not attract the doctrine of force majeure, as the court may find, subject, obviously, to the peculiar facts and circumstances of each case, that the COVID – 19 pandemic did not have an impact of such nature so as to permanently or for a significant period of time prevent the performance of the contract. In examining whether the COVID – 19 pandemic has had such an impact, so as to permanently or for a significant period of time, prevent the promisor to perform its obligations under the contact, perhaps, consider the global economic impact, and the resultant payment capacity of a promisor. This would be relevant especially in case of contracts involving a promise to pay, such as finance / loan agreements and rent agreements. In a case where the court takes a view that performance of a particular contract, in light of the facts and circumstances surrounding, is not hit by the doctrine of force majeure on account of the COVID – 19 pandemic, and consequently, the contract is not frustrated, it is possible for the court to hold that the executive orders imposing nationwide lockdown have caused a material adverse effect on the performance of the contract by the promisor, and invoke certain special equities and not hold the contract as void on account of frustration.

7. Whilst, the concept of material adverse effect is not ripe in the legal regime in India, the judicial fora in India may take references from the observations and interpretations of courts at United States of America (where the law of material adverse effect has evolved considerably), for their persuasive value. Accordingly, albeit, it is possible to argue the doctrines pertaining to force majeure, frustration of contract or material adverse effect as a defence in relation to performance of contract which has been hindered on account of the instant pandemic, much will depend on the peculiar facts and circumstances of each case. However, it is desirable that the parties explore equitable and commercially viable options for enforcing contracts, performance of which have been impacted owing to the COVID – 19 nationwide lockdown. REFERENCES: 1. Black’s Law Dictionary 983 (10th ed. 2009) 2. Satyabrata Ghose v. Mugneeram Bangur and Co. and Ors., AIR 1954 SC 44. 3. Metropolitan Water Board v. Dick Kerr and Co. Ltd., 1918 AC 119. 4. Lanco Hills Technology Park Pvt. Ltd. v. Manisha Balkrishna Kulkarni and Anr., 2019 SCC OnLine SC 1649. 5. M/s Halliburton Offshore Services Inc. v. Vedanta Ltd. and Anr., O.M.P. (I) (Comm.) & I.A. 3697 of 2020. 6. Boothalinga Agencies v. V.T.C. Poriaswami Nadar, AIR 1969 SC 110. 7. The Naihati Jute Mills Ltd. v. Khyaliram Jagannath, AIR 1968 SC 522. 8. Energy Watchdog v. CERC & Ors., (2017) 14 SCC 80 9. Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp and Ors., Commercial Arbitration Petition (L) No. 404 of 2020 10. Ramanand & Ors. v. Dr. Girish Soni & Anr., RC. REV. 447/2017 11. Rashmi Cement Ltd. vs. World Metals and Alloys (FZC) & Anr., O.M.P. (I) (Comm.) 117/2020 and O.M.P. (I) (Comm.) 118/2020. 12. M/S Polytech Trade Foundation vs. Union of India and Ors., W.P. (C ) 3092 of 2020, order dated May 22, 2020. 13. MEP Infrastructure Developers Ltd. vs. SDMC, W.P. (C) 2241 of 2020, order dated June 12, 2020

8. This article was published in ICSI Chartered Secretary August 2020 Issue (https://www.icsi.edu/media/webmodules/linksofweeks/ICSI-August_2020.pdf).