The powerful force of nature has always demonstrated its dominance over humanity through various cases of natural calamities that disturb humanity. India is facing one such case, which is currently witnessing an existential crisis with the introduction of the new incorrigible coronavirus (COVID-19) worldwide. The virus had reportedly claimed millions of lives and is also spreading like a forest fire in different countries.
In addition to the devastating impact that COVID-19 continues to unleash on humans and countries around the world, its reach has also reached commerce and business. COVID-19 has resulted in lockdowns or restricted movements in the countries. As a result, companies have been affected and so have operations, and consequently contracts and obligations under contracts are being reviewed to assess these impacts. The term that has become relevant today in the contractual context for companies today and that is most frequently heard is “force majeure” and this term will be interpreted in a contract in the context of COVID-19 in this article.
Understanding Force Majeure-
The concept of force majeure originated in French civil law and is widely applied in various customary law jurisdictions. The term “force majeure” has been defined in Black’s Law Dictionary as “an event or effect that cannot be anticipated or controlled.” It is a contractual provision that assigns the risk of loss if performance becomes impossible or impractical, especially as a result of an event that the parties could not have anticipated or controlled. While force majeure has not been specifically defined or addressed, some reference can be found in Indian statutes in Section 32 of the Contract Act, which provides that if a contract depends on the occurrence of an event whose event becomes impossible, then the contract is void.
From a contractual perspective, a force majeure clause provides a temporary postponement to a party of the performance of its obligations under a contract when an event of force majeure occurs. Said clause is a provision in an agreement that allows both parties to breach their contractual obligations due to unavoidable circumstances and situations beyond their control, thus releasing the parties from their respective responsibilities derived from the breach. However, in circumstances where force majeure events are not clearly clarified or the force majeure clause is present only in the form of a repetitive clause, their application becomes a matter of mixed interpretation. In these circumstances, the applicability of the clause is best determined by judicial interpretation.
The courts in India have repeatedly identified force majeure as a relevant ground for breach or frustration of the contract. In Narasu Pictures Circuit v. P.S.V. Iyer and Ors., the court had observed that “when it appears, due to the nature of the contract and the circumstances surrounding it, that the parties have contracted on the basis that something specific without which the contract cannot be fulfilled will continue to exist or that a future event that is formed the basis of the contract will be carried out, the contract, although in absolute terms, should be interpreted as subject to an implicit condition that if prior to non-compliance, performance becomes impossible without non-compliance by either party and due to circumstances that were not covered when the contract was made, the parties should be excused from higher performance.” The Hon’ble court had clearly identified the point that, after the advent of an event which makes contract performance impossible, the parties should be exempted from further performance.
General Force Majeure Clauses in Agreements and the Impact Thereof-
While some of the agreements have a force majeure clause, one question that may arise is whether the force majeure event excuse will be taken only if there is a specific clause in the agreement or event. In general, in all agreements, if the promisor has the obligation to immediately inform the promisee in the event of any event or incidence, any event of force majeure or act of God, such as earthquake, flood, storm or typhoon, etc. or other similar events, of which the promisor is aware, that are reasonably expected to adversely affect the promisor, or his ability to fulfil the obligations of the agreement. The terms of the agreement and the intention must be understood to determine the effect of the force majeure clause.
The next question that may arise is whether each force majeure leads to contract frustration. In general, the occurrence of an event of force majeure gives the promisee the right to terminate the agreement and take all necessary measures as deemed appropriate. For example, in the case of a lease, if the lessor considers that there is a risk to the equipment, the lessor may seek recovery of the leased equipment.
Furthermore, in the event that a force majeure event frustrates the very intent of the agreement, then the parties are under no obligation to comply with the agreement. For example, if the agreement (or its execution) becomes illegal due to any government notification or change in the law, which arises after the execution of the agreement, then such agreements do not have to be made at all. In such cases, if the agreement contains force majeure or a similar clause, Section 32 of the Indian Contract Act will apply. This section stipulates that contingent contracts to do or do nothing if an uncertain future event occurs cannot be enforced by law unless and until that event has occurred and if the event becomes impossible then, such contracts will be voided. Even if the agreement does not contain a specific provision to this effect, the doctrine of frustration under Section 56 of the Contract Act will still apply. The section establishes that a contract to perform an act that once the contract is made, becomes impossible or due to some event that the promisor could not avoid, illegal, it is annulled when the act becomes impossible or illegal.
In the current coronavirus outbreak situation in various countries, the sellers, airlines, shipping companies and, in certain circumstances, even consumers are more likely to invoke the force majeure clause. It is evident that the force majeure clause will lead to monetary losses. Considering the example of airlines in these circumstances, it can be anticipated that previously booked consumer tickets may be abruptly cancelled and the refund may not be processed due to force majeure. However, it should be clearly understood that the force majeure clause can only be applied when the specific situation under which such clause is invoked is specified in the agreement. In this sense, consumers can also take refuge in the force majeure clause to cancel their tickets and, consequently, they can claim their right of refund in case of force majeure. Considering the coronavirus outbreak worldwide, the force majeure clause can be invoked in numerous cases by parties from different sectors. However, the epicentre for its applicability would depend solely on the exact language of the agreement/contract.
In the aftermath of the coronavirus outbreak worldwide, the force majeure rescue clause can be a boon for parties in breach of an agreement, however, the solution of the affected party can be sought by reading the agreement in line with the other clauses to find a positive solution. The hermetic drafting of the agreements must be guaranteed to guarantee the equivalent rights of the parties.
Conclusion-
In light of the above, it is clear that the remoteness and the assessment of damages in view of this supervening event, that is, the COVID-19 pandemic may depend on several factors, such as the nature of the contract, the issue of performance, the substitute market, etc. Therefore, it is pertinent to point out that all the parties that have claims in relation to the infractions before the supervening event must carry out a holistic study of their facts and circumstances to determine their right.
The recent COVID-19 pandemic and related control measures by central, state and local governments have raised concerns regarding force majeure clauses in contracts. Therefore, it is recommended that one should review contracts carefully and consider trying to negotiate with other parties in good faith before any potential issues to avoid future issues with payment or performance. Undoubtedly, at a time like this, it is important for every business owner to review contracts and leases in anticipation of a possible prolonged effect on their business.
About author – This article is authored by Nishant Tiwari, 3rd year student of B.A. LL.B (Hons.) at National University of Study and Research in Law, Ranchi.
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