Introduction

As the global outbreak of the novel coronavirus and its domino effect on the economy intensifies, contractual parties have started to consider the need to modify or terminate their existing contracts. Not to mention, parties have progressively invoked force majeure provisions due to non-performance. The doctrine of supervening impossibility/frustration is cherished in the Indian Contract Act. As per Section 56, an agreement to do an impossible act is itself void. Further, on account of such impossibility, the whole contract becomes void when the act becomes impossible or unlawful.

The Bombay High Court, in fact, viewed this situation differently when it dismissed reliance on Section 56 of the Indian Contract Act, 1872.

The recent order passed by the Bombay High Court on 8 April 2020 (No 404 of 2020) in Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Ors is, remarkably, the first case where an Indian Court while dismissing a Commercial Arbitration petition, has held that the “lockdown cannot come to the rescue of the Petitioners so as to resile from their contractual obligations.” In other words, a lockdown in these unprecedented times, is not a legal basis for termination or repudiation of a contract.

This article, in view of the recent ruling of the Bombay High Court, analyzes the existence of force majeure provisions in commercial contracts, with a primary focus on the position under Indian Law, the engagement of common law doctrine of frustration with the COVID-19 outbreak and the recommendations for parties to consider in order to safeguard their respective positions in view of the aggravating situation.

Background

The underlying petition was filed under Section 9 of the Indian Arbitration and Conciliation Act seeking directions to restrain the Respondent-Bank from encashing the letters of credit. The Petitioners, while relying on Section 56 of the Indian Contract Act, submitted, that in view of the COVID-19 pandemic and the subsequent lockdown declared by the Central Government, its contracts with Respondent No. 1 were terminated as unenforceable on account of frustration and impossibility to perform. The contracts had Respondent No. 1 supply certain steel products to the Petitioners, which had to be dispatched from its head office in South Korea. The contracts were subject to the general terms and conditions which included the force majeure clause. Surprisingly, it was the Petitioners who were relying on the force majeure clause, which, in fact, was only applicable to Respondent No. 1.

Decision

The Bombay High Court, while dismissing the petition, held that the force majeure clause in the present contract is applicable only to Respondent No. 1 and cannot come to the aid of the Petitioners. The contract terms being on Cost and Freight basis, Respondent No. 1 did comply with its obligations and shipped the goods from South Korea. However, the fact that the Petitioners couldn’t perform their own obligations to pay back, so far as their own purchasers are concerned or the fact that it could suffer damages, is not a factor which can be considered or held against Respondent No. 1.

Even though, the challenge was dismissed, one aspect of the Court’s reasoning merits special attention.

The Court seized the opportunity to correct what it considered to be the wrong standard for treating a ‘force majeure event’ and the application of ‘Doctrine of Frustration’ of Contract on account of COVID-19. According to the Bombay High Court, in any event, “The lockdown was temporary and only for a limited period, making it a bad excuse for the Petitioners so as to resile from their contractual obligations with Respondent No.1 of making payments for their supply.” Meaning, that mere hardship in performance of an obligation in view of the COVID-19 pandemic is not a valid objection which can be used against a seller.

Language of the Force Majeure Clause in the Contract

In order to invoke force majeure, it is of the utmost importance that performance must be objectively impossible, merely difficult or uneconomical performance is not sufficient. Under Indian contract law, the Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission clearly laid down that only those events, which are explicitly included in the contract, can excuse a party from performance. Meaning, that a force majeure clause, at all times, will be strictly interpreted.

It is pertinent to note that the force majeure clause did include ‘epidemics’ as per Article 11 of the contract between the parties. Moreover the clause gave the ‘seller’, the ability to terminate the contract or any portion affected thereof by such an event and not the buyer, the petitioners in the instant case. Thereby, it seems, that the Bombay High Court gave fair reasoning by saying that the “Force majeure clause present in the contract cannot come to the aid of the Petitioners, when clearly, it is applicable to Respondent No.1.”

The Absence of a Force Majeure Clause in a Hypothetical Contract

Where there is absence of a force majeure provision within a contract, there is a possibility to invoke, the doctrine of ‘supervening impossibility’ by way of Section 56 of the Indian Contract Act. The provision clearly states, that in case a contract to do an act becomes impossible to perform, by reason of some unavoidable circumstances, which the promisor cannot prevent, it will be unlawful and subsequently, the whole contract becomes void.

Since, the Act does not define the term ‘frustration of contract’, there is only a little relief available to the parties, which is possible by proving the ‘absolute’ impossibility of contractual performance.

COVID-19: A Supervening Impossibility or Mere Hardship?

To check whether the magnitudes of the ongoing pandemic will qualify as an impossibility, it is essential to ascertain the threshold set by the Apex Court in this regard. In the landmark case of Satyabrata Ghose v. Mugneeram, the Supreme Court held that

“The performance of an act may not be literally ‘impossible’, but may be 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.”

However, the Supreme Court adopted a hazy approach in Energy Watchdog v. Central Electricity Regulatory Commission, where it propounded that parties can invoke the doctrine of frustration and seek exemption from performance if they can validate, that performance of doing such an act will be impracticable and hopeless, keeping in consideration the object and purpose sought and intended to be achieved at the time parties signed the contract.

It is pertinent to note, that recently, in February 2020, the Government of India issued an Office Memorandum regarding the disruption of supply chains on account of coronavirus and whether such an extraordinary event will be covered in force majeure clauses or not. The Government’s Memorandum was constructive in clarifying that the COVID-19 pandemic should be considered as a case of ‘natural calamity’ and that force majeure clauses may be invoked wherever considered suitable.

Therefore, while parties decide to invoke doctrine of frustration, they need to prove that the non-performance was outside reasonable control of the party. So far as English law is concerned, force majeure provisions are express terms and will not ordinarily be implied into contracts. Much depends on the terms of the contract and the force majeure clause in particular.

Conclusion and Suggestions

One needs to bear in mind, that proving ‘frustration’ in an Indian Court of Law would not be easy, clearly, because of the fact that the courts would be only be willing to interpret the outbreak of COVID-19 as mere hardship and in any case, the language of the force majeure clause does not specifically include the pandemic. It really will be a challenging task.

It is advisable for parties to retain evidence, i.e. the supporting documents with regard to the impossibility of performance, delay or notices served, if any. Notices must be served promptly showing that the contract has become impossible to perform or that a force majeure event has occurred. It is also necessary for parties to identify the origin of such non-performance. Reviewing financing and insurance agreements to cover any unexpected losses should be of the highest priority.

For parties ‘receiving’ notices of force majeure, it is necessary for them to determine whether such notice holds consistency with the protections contemplated by the clause, if due process has been followed and whether supporting documents are available. Parties claiming force majeure should be very careful about the evidence of such impossibility, what steps they are taking to prevent such impossibility and the magnitude of that event, since parties making claims are always at a risk of making a wrongful claim.

Most importantly, parties need to determine whether the events associated with COVID-19 prompt the ‘material adverse event’ term in the contract. Meaning, that subsequently, post execution of the contract between the parties, the events took an ‘unexpected turn’. This could be a valid line of argument, although it will again depend on the language as well as specifics of the case.

Lastly, if the contract becomes wasteful on account of the COVID-19 crisis and loses its economic value, or if the other party wishes to repudiate or terminate the contract in order to mitigate or prevent any further losses, it is recommended that parties rely on the ‘termination clause’, ‘entitlement to terminate’ or any such clause as may be specified in such a contract.

Tushar Behl is a student in his final year at the School of Law, University of Petroleum and Energy Studies in Dehradun, India.

Suggested citation: Tushar Behl, How the Bombay High Court is Changing Force Majeure Amid COVID-19, May 14, 2020, https://www.jurist.org/commentary/2020/05/tushar-behl-force-majeure-india-covid19/

This article was prepared for publication by Tim Zubizarreta, JURIST’s Managing Editor. Please direct any questions or comments to him at commentary@jurist.org