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Force Majeure: The clause for 2020

Disclaimer: I do not pretend to be an expert on the subject matter. I would refer to myself as a "student" of the subject matter on hand who is providing facts and knitting a story for a better understanding of the topic.

The spread of the Covid19 pandemic has brought our economic gears to a screeching halt. Every function throughout the supply chain has suffered. More than half of the world's population is currently under lockdown. A sharp decline in consumption has wreaked havoc to a number of industrial sectors, financial markets, and trade. Non-availability of workers has disrupted the business as usual. This has brought a lot of pressure on firms in regard to their contractual obligations. The criticality of timely completion is explicitly emphasized in a contract. In times of crisis where the locus of control is beyond the limits of the contractor, the clause of "force majeure" has been constantly visited. Although a useful tool in hedging the risks against events out of control, it does not have a straightforward interpretation & implementation and is unique to the context of the issue.

Force majeure is derived from the French which translates to "superior force". It is a common clause used to excuse the parties of the contract from the liabilities or obligations as defined in the scope of work provided the event is beyond the control of the parties. The clause does not include situations wherein the liability as generated in the course of implementation of the project is a result of negligence or mistakes causing problems in performing the obligations of the party in the contract, a result of regular and natural external forces, and in circumstances wherein it is explicitly mentioned in the contract.

In order to correctly interpret the force majeure clauses in the context of the contract, it is critical to understand the underlying legal system from which it derives the interpretation. There are three major types of legal systems practiced across the world: Civil law, Common law, and Theocratic law. For all practical purposes, we will understand the distinction between civil law and common law.

  1. Civil law originates from Roman law. It is a codified system of law and there is a written constitution based on the specific codes documenting the basic rights and duties. In the perspective of the contract, several provisions of the contract are implied into the contract. This means fewer provisions are set out and any inadequacies can be remedied by operation of law. They are usually smaller in size compared to contracts under the common law system. It is prevalent in France, Germany, Spain, Portugal, and countries in South America

  2. Common law: In this form of system, doctrines, and rules are developed over time by the judges and form the bedrock of legal precedents in the future. It is derived from Britain and will be prevalent in commonwealth countries like India and the USA. It is necessary for the common law contracts to explicitly mention the contract provisions and fewer provisions are implied. The contracts under the common law system are longer than the contract under the civil law system.

Force majeure clauses for civil law systems are defined depending on the law of land. In France, it has to pass the three tests of externality (event caused by external stimulus), unpredictability (cannot be foreseen), and irresistibility (unpreventable events). Force majeure clauses for common law systems are based on the explicit mention in the contract. It is emphasized that the clause can be activated only when there is a real presence of physical or material restraint. the clause cannot be activated in fear or apprehension of those physical and material restraints. The essence of the clause is not to suspend the obligations entirely but to delay the deadlines to accommodate the uncontrollable event. The basis of force majeure can be derived from the doctrine of "frustration". A change in circumstances makes the performance of the contract an impossibility. Frustration and Impossibility can be used interchangeably.

Force majeure is essentially a civil law concept. The common law was extremely rigid and did not consider anything which was not written.

With respect to Force majeure, section 56 of the Indian Contract Act, 1872 becomes essential. Section 56 of the Indian Contract Act, 1872 states that "A force majeure clause relieves one or both parties from liability to perform contract obligations when performance is prevented by an event or circumstance beyond the parties’ control." Typical force majeure events may include fire, flood, civil unrest, or terrorist attack. Force majeure is a term used to describe a "superior force" event. The purpose of a force majeure clause is two-fold: it allocates risk and puts the parties on notice of events that may suspend or excuse service.

Due to the Covid19 pandemic, there have been strong lockdown and containment measures across the world. Governments have classified essential services and stopped all the non-essential services till the time things recover. There is a high shortage of labor in the market, the trucks running on the road are a faction of India's need for logistics, and pressure on the raw materials industries has caused shockwaves across the supply chain.

To understand the force majeure clause, we need to go through several cases to understand the judgment and the basis behind it.

Under Indian law, one of the first decisions to deal with the concept of force majeure was the Madras High Court decision in Edmund Bendit And Anr. vs Edgar Raphael Prudhomme. In this case, the Court cited with approval the passage from Matsoukas v. Priestman and Co, wherein the definition given by an eminent Belgian lawyer of force majeure as meaning "causes you cannot prevent and for which you are not responsible", was adopted. Under both Indian and English law, force majeure does not simply mean anything outside the control of the parties to a contract. Its meaning, and applicability, depend on the particular contract, and the particular wording used. It is a contractual language intended to anticipate unforeseen events and provide for what happens on their occurrence.

InSatyabrata v. Mugneeram, the Supreme Court has observed that various theories have been propounded regarding the juridical basis of the doctrine of frustration yet the essential idea upon which the doctrine is based is that of the impossibility of performance of the contract. In fact, the impossibility of performance and frustration are often interchangeable expressions. Also, the meaning of the term 'impossible' was explained u/s 56. The Supreme Court made it clear that unlike English law the word impossible has not been used in the sense of physical or literal impossibility. The performance of an act may be impracticable and useless from the point of view of the object and whether it forms the basis of the contract rightfully has to be decided by the courts.

Also in Sushila Devi vs. Hari Singh5, it was observed that the impossibility contemplated by section 56 of the Contract Act is not confined to something which is not humanely possible. As it was a case of lease of property, after the unfortunate partition, the property in dispute which was situated in Gujranwala, went onto the side of Pakistan, hence making the terms of the agreement impossible.

In another Supreme Court case, Nirmala Anand vs. Advent Corporation Pvt. Ltd.6, the case was relating to suit for specific performance of the agreement for the purchase of a flat in building construction on a plot leased out by the municipality. The court held that unless the competent authorities have been moved and the application for consent or sanction has been rejected once and for all and such rejection made finally became irresolutely binding and rendered impossible the performance of the contract resulting in frustration u/s 56 the relief cannot be refused for the pointing out of some obstacles.

In Li Ching Wing v Xuan Yi Xiong, popularly known as the “SARS” case, the court found that a 10-day isolation order by the department of health did not allow a tenant who had taken premises for a two-year period to terminate the tenancy agreement by arguing that it had been frustrated by the unexpected outbreak of such a deadly virus.

Classic Maritime Inc v Limbungan Makmur SDN BHD, Lion Diversified Holdings BHD [2019] EWCA Civ 1102. The case concerned a failure by a charterer to deliver a cargo of iron ore after an accident at the relevant mine. The Court of Appeal held that the clause did not protect the charterer from liability for breach of duty in circumstances where it would not have been able to perform the contract regardless of the accident (as the clause required that the failure to perform be 'resulting from the force majeure event).

Seadrill Ghana Operations Ltd v Tullow Ghana Ltd [2018] EWHC 1640 Comm. In this case, an oil company failed to carry out drilling due to (i) a moratorium imposed by the Ghanaian government, and (ii) Ghana’s refusal to approve the drilling for separate reasons. The High Court held that the force majeure event must be the only effective cause of default to engage the protection of the force majeure clause; and that the defendant’s failure to use reasonable endeavors to secure approval would also have prevented reliance on the force majeure clause in this case.

From the above cases, it is clear that force majeure clauses cannot be applied without sufficient evidence that the event is rendered impossible due to an external cause despite all the efforts put into it to stop the damage caused by the event. The steps taken by India to address this are as follows:

  1. The Finance Ministry on February 19, 2020, clarified that the meaning of force majeure shall include the present pandemic as a case of natural calamity and hence if the contract mentions natural calamity in the force majeure clause then non-performance of the contract can be exercised by the contracting parties stating COVID-19 as a force majeure event.

  2. The Reserve Bank of India (RBI), on March 27, 2020, announced that all commercial banks, co-operative banks, all-India financial institutions, and NBFCs are permitted to grant a moratorium of three months on payment of all installments falling due between March 1, 2020, and May 31, 2020.

  3. The Securities and Exchange Board of India (SEBI) has considered the present situation fit to introduce various relaxations in compliance for listed companies.

  4. Even the courts and judicial forums have been constrained to either completely close their operations during the lockdown in India or are operating on an extremely limited scale via video conferencing, exclusively for extraordinarily urgent matters. This is also why the Supreme Court (SC) thought it was advisable to notify an extension of the statutory period of limitation for approaching courts to protect litigants from the technical difficulty of the time bar. Additionally, the High Courts notified the extension of interim orders for this period of lockdown.

  5. India's biggest container terminal, run by Maersk at Mumbai port, as well as Adani Ports in Gujarat, has already declared force majeure, joining oil refiners Indian Oil and Mangalore Refineries. It is also learned that several big Indian corporate houses have begun sending notices to their business associates, threatening to discharge themselves of contractual obligations claiming force majeure.

Usual fluctuations in the economy do not lead to a Force Majeure event. There is not a clear interpretation, identifying this crisis as one of the categories of force majeure. As explained above, the contracts will themselves be considered and interpreted to see if it will trigger the force majeure clause. The terms and conditions in the agreements will get priority under such situations. Parties should mutually consider their options/remedies during this epidemic.

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