The onset of COVID -19 has made it increasingly difficult for individuals as well as Companies to honour their Commercial obligations. The Question how would a pandemic such as COVID -19 affect existing Contracts. One contractual provision that comes to my mind is Force Majeure.
Force Majeure is a clause which enables a party to a Contract to append their obligation for a temporary period owing to occurrence of an unforeseen event which is outlined in the clause of the Contract; however Force Majeure has its statutory basis in section 32 of the Indian Contract Act. Through this brief I am trying to bring up to speed with regard to basics of Force Majeure during such Pandemics.
The phrase act of God refers to an unforeseen event that has arisen from natural causes, is ordinary in nature and in nature is such that it could not be controlled by human forces. Whikle drafting a Force Majeure Clause certain unforeseen events or situations are classified as Force Majeure Events . These typically include both natural and non natural such as floods, earthquakes, wars military action, government action etc and ordinarily are framed broadly wherein the phrase Act of God is also typically included as a Force Majeure Event.
DOES A PANDEMIC SUCH AS COVID -19 FALL WITHIN THE SCOPE OF ACT OF GOD
Would including the phrase Act of God protect you against such Pandemics. One way of proving that it is a Force Majeure Event is by looking at the contractual provision. If the Force Majeure clause expressly includes epidemic then under the contract you can enforce the Force Majeure Clues. If a specific reference is not given look for generic words which broaden the scope of the clause such as included but not limited to and apply the ejusdem generis rule.
If the Force Majeure clause does not include epidemic then CXONVID -19 by itself would not constitute Act of God owing to its controversy over its origin and the allegations made against China, the fact remains that epidemic of this scale could not be anticipated hence invocation of act of God may not be adequate to protect you. It is not the epidemic itself which has stalled the performance of the contract but the ensuing lockdown, hence a phrase such as Governmental action or arising out of an act of God may be relied upon as well, also generic terms such as included but not limited to would also help if the clause is broad enough to cover it.
The Finance Ministry in or around Feb 2020 issued a memorandum wherein it stated that Corona virus should be treated s natural calamity and Force Majeure should be invoked wherever appropriate , however this not a binding document and the parties to a Contract especially if one of the parties is not a Government are free to go by contractual provisions ( procurement policy division, ministry of Finance
REQUIREMENT OF NOTICE UNDER FORCE MAJEURE
A FORCE MAJEURE CLAUSE TYPICALLY ALSO HAS A NOTICE REQUIREMENT WHEREIN DEFAULTING PARTY I REQUIRED TO INTIMATE THE OTHER PARTY THAT UNFORESEEN CIRCUMSTANCES HAVE INTERRUPTED PERFORMANCE AND HENCE FORCE MAJEURE NEEDS TO BE INVOKED WITHIN A PROVIDED DURATION EVEN IF SUCH A REQUIREMENT IS NOT PROVIDED IN THE INTEREST OF JUSTICE AND TO AVOID ANY DISPUTE OF DELAY YOU SHOULD IDEALLY INFORM THE OTHER PARTY OF YOUR INTENTION TO INVOKE FORCE MAJEURE HOWEVER IF THE UNFORESEEN EVENT CONTINUES BEYOND THE MAXIMUM DURATION THEN A FORCE MAJEURE CLAUSE WOULD IDEALLY CONTAIN AN OPTION OF TERMINATION WHICH WOULD BE CO TERMINUS WITH YOUR TERMINATION CLAUSE IN THE CONTRACT.
WHAT IF THE CONTRACT DOES NOT HAVE A FORCE MAJEURE CLAUSE
If a contract does not have a Force Majeure Clause how would you face the current situation, this is where section 56 of the Indian Contract Act arises. Section 56 of the Indian Contract Act deals with contracts subsequent to entering onto which the performance becomes impossible
It states the following “Contract to do act afterwards becoming impossible or unlawful. A contract to do an Act which after the Contract is made becomes impossible or by reason of some event in lawful becomes void when the act becomes impossible or unlawful.
What would be the applicability of section 56 to make a contract void
OBJECT / PURPOSE OF CONTRACT BECOMING IMPOSSIBLE
IMPOSSIBILITY MEANS THAT THE ACT HAS BECOME SO IMPRACTICABLE NOW THAT IT HAS DEFEATED THE OBJECT OR THE PURPOSE OF THE CONTRACT ITSELF
GROUNDS FOR IMPOSSIBILITY – DESTRUCTION OF THE SUBJECT MATTER, CHANGE OF CIRCUMSTANCE. THE CONTRACT BECOMES VOID FROM THE DATE OF IMPOSSIBILITY. IF YOU ARE A BUYER AND IF YOU HAVE PAID ADVANCE PAYMENT THEN IN TERMS OF SECTION 56 YOU ARE LIABLE TO GET REFUND, HOWEVER DELAY AND IMPOSSIBILITY ARE TWO DIFFERENT THINGS. IN ORDER TO AVAIL SECTION 56 PERFORMANCE OF CONTRACT SHOULD HAVE BEEN IMPOSSIBLE. A MERE DELAY WOULD NOT CONSTITUTE IMPOSSIBILITY TO PERFORM.
UNFORSEEN EVENT WHICH THE PROMISOR COULD NOT PREVENT.
UNFORESEEN EVENT MEANS AN EVENT WHICH COULD NOT BE FORESEEN BY THE PROMISOR ON THE DATE OF MAKING THE PROMISE OF PERFORMANCE. COVID 19 WILL FALL IN THE CATEGORY OF UNFORESEEN EVENT AS IT WAS IMPOSSIBLE FOR THE PROMISOR TO FORSEE SUCH EPIDEMIC AT THE TIME OF ENTERING INTO THE CONTRACT LET ALONE FORSEE THE CONSEQUENCES OF THE EPIDEMIC ON THE CONTRACT AND SUCH AN EVENT COULD NOT HAVE BEEN PREVENTED BY THE PROMISOR HOWEVER IF THE OTHER PARTY IS ABLE TO SHOW THAT THE PROMISOR COULD HAVE PREVENTED THE CONSEQUENCE OF THE UNFORESEEN EVENT , THE LEGAL CONSEQUENCE WOULD BE DIFFERENT.
IF YOU ARE THE DEFAULTING PARTY WHO COULD NOT PERFORM THE CONTRACT OWNING TO THE EPIDEMIC
EITHER INVOKE FORCE MAJEURE CLAUSE
ARGUE FOR FRUSTRATION OF THE CONTRACT
NEGOTIATE FOR EXTENSION OF TIME
AVAILABLE REMEDIES FOR NON DEFAULTING PARTY
IF TIME IS OF THE ESSENCE OF THE CONTRACT AND THE DEFAULTING PARTY HAS NOT HONORED THE SAME NEITHER INVOKED FORCE MAJEURE CLAUSE YOU MAY SUE THE DEFAULTING PARTY FOR BREACH.
Tasneem Saria, Sr. Associate
Advocates & Solicitors
Tel: (022) 2267 4729
Web: www.srivastavandco.com / .in