Global Indian of the year, Dr. Kislay Pandey shares his thoughts on Contracts and Force Majeure in the times of COVID
The current pandemic situation is one of an unprecedented nature. The world is combating with this Covid-19 catastrophic, while the businesses across the globe are witnessing the worst losses in the history, some even drowning towards bankruptcy. Supply chains are surrounded with extreme uncertainty leading to absolutely no control over the consequences. It is that time when the parties are going to look out for that contingency clause, if any, in the name of force majeure to save them and buy time to build up the crumbled forts.
As per the Black’s Law Dictionary, force majeure is an event or effect that can be neither anticipated nor controlled. The term includes acts of nature- flood, earthquake and hurricanes or, acts of people- riot, strike and wars. The word force majeure is a French version of the Latin expression ‘Vis major’. It has a wide interpretation. It acknowledges the fact that events like strikes, breakdown of machinery, which otherwise are not inclusive in vis major are included in force majeure.
Currently around 210 countries in the world are struggling through the global crisis on account of novel coronavirus. Covid-19 was officially declared as a pandemic by World Health Organization on 11th March, 2020. Supreme Court lawyer, Dr. Kislay Pandey shares, “This global calamity has not just resulted into medical emergency leading to loss of million lives and has also adversely impacted on business and global economies on account of restricted market due to lockdown. There have been disruption in the economies in the past, for example- during Gujarat earthquake or the Tsunami, but the Covid pandemic seems to have surpassed them all”.
The flowchart for any business or commerce to grow depends a lot on the contract entered into between the parties. The law of contract lays down the reciprocal obligation of the parties. As per section 37 of the Indian Contract Act, 1872, the parties to a contract must either perform, or offer to perform, their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law. On account of this pandemic, the situations may arise in a string of commercial contracts wherein a party, without any fault on its part, is unable to perform its part on the contract.
Invoking Force Majeure
Force majeure is an occurrence that cannot be anticipated, preventing a party from performing a promise that they had undertaken to fulfill. It includes both the act of nature and act of man. According to force majeure, if it is established, relieves the defaulting party of its obligations under the contract.
The law accepts that a force majeure clause is binding although force majeure is statutorily not defined and the parties are free to agree contractual terms. However, section 32 of the Indian Contract Act, 1872 (Act), which provides for contingency contracts, may be considered a statutory starting point of force majeure.
Covid-19 may be considered a force majeure event if:
· The clause defines the word pandemic or epidemic as such
· The clause is merely indicative and does not provide an exhaustive list of events
· The clause uses generic words or phrases such as government decision, national interest, travel restriction or natural calamity.
Dr. Pandey observed that, ‘The result of invoking a force majeure clause should be set out in the clause itself, and may include the suspension of contractual obligations during the prevalence of force majeure event, the termination of the contract, and the suspension of contractual obligations with termination should be the force majeure’.
There are three things that must exist for an event to qualify as force majeure:
1. Externality- the cause has not occurred due to the fault of the defaulting party,
2. Unpredictability- the cause was unforeseeable or inevitable, and
3. Irresistibility- the cause should have made the execution of the contract absolutely impossible.
Invoking Doctrine of Frustration
A contract that did not include the force majeure clause or where it is not possible to construe and cover Covid-19, a party that is unable to perform its obligation may take the recourse of Section 56 of the Indian Contract Act, 1872, which codifies the common law doctrine of frustration. It states about Agreement to do impossible act.
The doctrine maybe invoked if the following three conditions exist:
1. A valid and subsisting contract between two parties,
2. Some or whole part of the contract is yet to be performed, and
3. Impossibility to perform after the contract has been entered upon for reasons beyond the party’s control.
Dr. Kislay adds that, ‘the contracts, even though not containing a force majeure clause are considered frustrated by virtue of section 56 of the Contract Act, due to the spread of Covid-19. Once the contract is held to be frustrated, it shall be considered void and therefore unenforceable.
Whether the parties shall invoke the force majeure clause or the doctrine of frustration under section 56 depends vastly on the facts of the case and the terms of contract agreed between the parties. If the party successfully establishes force majeure it shall be relieved of its obligation to perform his part of the contract and shall also be relieved of payment of any damages to the other parties.
The situation of the pandemic and the subsequent lockdown and restricted movement as declared by the government resulting into standstill of economic activities around the world is something that nobody could have foreseen. And the considering the current jurisprudence, it shall only lead to string of litigation one after the other. Dr. Kislay Pandey says that, “At Managium Juris, we have promptly and effectively transitioned our teams to working remotely. We understand the kind of challenges that clients are facing as a result of Covid-19, and we as a team are here to provide necessary support. As a part of the same initiative we have also launched free legal aid to coronavirus patients”.
