FORCE MAJURE , CORONA VIRUS OUTBREAK, AND COMMERCIAL CONTRACTS
The spread of Coronavirus has forced economies globally into nationwide lockdowns incapacitating businesses to perform activities conventionally. This has taken a hit on the commercial agreements of these businesses resulting in non- performance, delay, interruption or even cancellation of agreements. Parties to such Agreements are seeking a temporary moratorium for the performance of obligations and even cancellation of agreements on account of licit conditions preventing the performance of their obligations under the agreements. Businesses are also using the coronavirus outbreak as a defence against hostile deals to get out of unfavourable agreements. Non-performance of obligations on parts of the suppliers/ service providers and disruption to supply chain may also prevent certain businesses in the performance of their obligations.
One common mechanism to seek relief in such a situation is through reliance on a Force Majeure clause contained in the agreements. Force majeure clause is typically included in commercial agreements to deal with certain scenarios enumerated in the agreement such as Act of God, fire, war etc., deeming performance of contractual obligations impossible. The term Force Majeure means "superior force” and may encompass "Act of God" (such as earthquakes or tsunamis) and certain acts of the man of a disruptive and unforeseeable nature such as war, curfew, etc.
In situations where the agreement prescribes a Force Majeure clause and upon the occurrence of a Force Majeure Event, the arrangement between parties is governed strictly in accordance with the mechanism as mentioned and agreed upon between the parties by way of the agreement. The party invoking the clause shall at the earliest inform the other party of occurrence of such an event and their inability in performing its contractual obligation. An archetypal Force Majeure clause would require that the disruption of performance is beyond the invoking party's reasonable control and that the event was not reasonably foreseeable.
Whether the lockdown caused due to coronavirus would qualify as a Force Majeure event will depend on specific agreement and in the manner and wording of the Force Majeure clause or what all eventualities are captured (explicitly or impliedly) in the clause. The occurrence of such eventualities would qualify as a Force Majeure event and the burden of proof shall rest on the party invoking the Force Majeure clause. The said burden can be effortlessly discharged where Force Majeure clause in the contract explicitly provides for events like epidemics, pandemics or government restriction. However, the situation may become convoluted where a Force Majeure clause is not explicitly worded and simply uses the term "Act of God" or "event beyond the reasonable control of parties".
For situations where the commercial agreement is either silent on the mechanism of Force Majeure or does not contain a Force Majeure clause at all, the recourse is taken to Section 56 of the Indian Contract Act, 1872 (Act), which sets out that an agreement to do an impossible act is in itself void. Accordingly, it provides that any 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 - becomes void when the act becomes impossible or unlawful. This is also called the Doctrine of Frustration.
For such situations, reliance on Section 56 of the Act depends upon the following conditions:
a. Existence of a valid and lawful agreement between the parties.
b. Subsistence of performance of an obligation, either in part or in full.
c. Impossibility to render such obligation due to the occurrence of an unforeseeable event beyond the control of such party.
Indian Judiciary has time and again by various judgements defined the outset of ‘impossibility’ as contained in section 56 of the Act, For instance, in the landmark case of Satyabrata v Mugneeram, 1954 SCR 310, the Supreme Court discussed various aspects of the doctrine of frustration dependent on the impossibility of performance of the contract as contained in the Act. The court observed that “the central idea upon which the doctrine of frustration rests is that of the impossibility of the performance of the contract, in fact, the expressions impossibility and frustration are often used as interchangeable expressions”. It was observed that “Section 56 lays down a rule of positive law and does not leave the matter to be decided as per the intention of the parties”. However, 63 years later in the matter of Energy Watchdog v Central Electricity Regulatory Commission and Anr. (2017) 14 SCC 80, the Supreme Court took an altered stance on the threshold of impossibility and observed that “The performance of an 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.”
Having stated the above, it is pertinent to note that the Force Majeure clause contained in the agreement will primarily decide and control the mechanics between the parties and in the absence of a Force Majeure clause, any party can invoke the Doctrine of Frustration under Section 56 of the Act. In order to invoke either of the two, parties must show that the performance of a contract has become impossible, and the arrangements and conditions have fundamentally been altered from those landscaped in the agreement. Keeping the aforementioned into consideration, the implications of the lockdown in India caused by coronavirus outbreak would have to be analysed and decided on a case to case basis.
About the Author:
Karan is an Assistant Manager at Super Highway Labs Private Limited (Shuttl)
LLM (IPR) - Hidayatullah National Law University.
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