Review contracts before seeking relief under force majeure

Force majeure translates literally from French as superior force. The phrase is legally understood to mean the intervention of an unforeseeable event which could not have been within the reasonable anticipation of the parties to a contract and is beyond their control, and the event is such that it interferes with the performance of the contractual obligations even to the extent of rendering the performance impossible. A force majeure event may excuse the performance of the contractual obligation and the contract may even be discharged. Acts of God, war, legislative intervention etc are the usual examples of force majeure events. Under the Indian law, Section 32 and Section 56 of the Indian Contract Act 1872 deal with force majeure.

Section 56 incorporates the principle of discharge of contract by impossibility of performance also known as the doctrine of frustration. Although there is no reported case law directly on the operation of force majeure clauses in the context of epidemics or pandemics. However, with the present lockdown protocols in force in India and around the world, business activities have come to a grinding halt, bringing to focus the applicability of the force majeure clauses and rights and obligations under contracts, particularly whether the parties will be excused from performing their part of the deal wholly or partially, as the case may be. The law regarding frustration and force majeure is well settled in India through the landmark decisions of the Supreme Court in the case of Satyabrata Ghose vs Mugneeram Bangur & Co. (AIR 1954 SC 44). The entire jurisprudence on the subject has been brilliantly summarised by Justice R.F. Nariman in a recent decision of the Supreme Court in Energy Watchdog vs CERC (2017) 14 SCC 80. Under the Indian law, unlike some other jurisdictions, force majeure is a feature of the general law relating to contracts and if the courts in India declare the Covid-19 pandemic to be a force majeure event then in all cases where, as per the fact and circumstance of each case, the Covid-19 event made the performance impossible, attracting the provisions of Section 56 of the 1872 Act, the performance would be excused. In unprecedented circumstances like the present, the courts are likely to be generous in their interpretation of the present pandemic as force majeure, when faced with parties who have encountered genuine difficulties in performing.

However, such parties will still need to show that their non-performance, or late performance, was truly outside their control and could not have been prevented or mitigated. Even if the Covid-19 pandemic and related government action is treated to be a force majeure event, the question that arises next for consideration is the impact on the affected party’s ability to perform its contractual obligations. If the impediment created by the Covid-19 pandemic was such that it made the contract impossible of performance or changes the nature of the contract altogether, then the contract will be hit by frustration and will stand discharged. In other cases, where the pandemic does not strike out the performance but only makes it a bit more onerous, the rights and obligations will be governed by the force majeure clauses incorporated in the contract and the precise words of such clauses will be critical. The impact of the pandemic will be different for different sectors. The infrastructure and development projects are usually of durations running into several years. Owing to suspension of work and transport restrictions such projects may face delays and cost overruns.

However, the force majeure clauses do cover for such contingencies and the loss incurred will be dealt with according to the content of such clauses. The force majeure clauses usually impose a duty on the party claiming to show that it has taken all reasonable endeavours to avoid or mitigate the event and its effects. This is a subjective standard and will be interpreted on a caseto-case basis. The force majeure event or circumstance must be the cause of the contractual breach and a party claiming force majeure is typically required to establish that it was the force majeure event (and not some other factor) that caused the party to fall short of its contractual obligations. Recently, even the Supreme Court of India had invoked its plenary powers under Article 142 of the Constitution to extend the “limitation period” in all cases against the usual timelines as enumerated under the Limitation Act, 1963. With the severity of the pandemic beyond doubt, the impact which the lockdown protocols are going to have on infrastructure and development projects is anybody’s guess.

The months after the lockdown period will see slow growth and as things will crawl back to normal, the disputes relating to the infra projects will require swift resolution either by arbitrators or by courts. Although there are indications that the government is going to adopt a liberal approach and any disruptions directly attributable to Covid-19 related events shall be covered under the force majeure clauses, it will be prudent for the parties to re-assess and review the contracts, in order to analyse and quantify the impact of the Covid-19 situation, explore alternative methods of performance and adapt the contracts accordingly thereby in the least avoiding unnecessary litigation costs. I guess new jurisprudence will evolve charting out the doctrine of force majeure in situations such as Covid-19 and similar calamities. This article is written by Pinky Anand, Additional Solicitor General of India, assisted by Sumit Teterwal, Advocate.