As the nationwide lockdown due to COVID -19 situation continues GVK owned Mumbai International Airport is seeking a waiver from revenue payment to the Airport Authority of India (AAI). GVK has invoked the force majeure clause to suspend payments for April-June period. AAI, it is learnt, has not agreed to force major event and hasn't given any waiver but decided to defer their payments for April-June.

In the meanwhile, applying force majeure, the Brihanmumbai Municipal Corporation (BMC) has extended validity of various development permissions granted by it for building constructions in Mumbai. In a circular BMC has ruled that the validity of all IODs (Intimation of Disapproval), expiring between March 1,2020 and June 30,2020, be extended upto September 30,2020.

A debate is going on in legal and business circles whether “force majeure” will apply to the COVID-19 situation.

The law of Contracts lays down the reciprocal obligation of the parties. As per Sec 37 of the Indian Contract act,1872, the parties to 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 any other law. In the prevailing situation due to the COVID-19 pandemic a large number of contracts are facing constraints since contracting parties are not able to perform their part of the contract.

So then what are the commercial consequences of COVID-19 pandemic ? Whether this COVID-19 pandemic could be treated as a “force majeure” What is the distinction between “force majeure” and “frustration of contract”?

Black’s Law Dictionary defines “force majeure” as : “A contractual provision allocating the risk if performance becomes impossible or impracticable, especially as a result of an event or effect that the parties could not have anticipated or controlled”. Merriam-Webster Dictionary defines “force majeure” as “Superior or irresistible force. An event or effect that cannot be anticipated or controlled”.

“Force Majeure” & “Vis-Majo

While “Force Majeure” means an event or effect that can be neither anticipated nor controlled and includes acts of nature and acts of people, namely floods, cyclone, riots, strikes, wars, etc., “Vis Major” - Act of God means an overwhelming, unpreventable event caused exclusively by forces of nature, such as earthquake, flood, cyclone or tornado.

Thus “force majeure” is definitely wider than “Vis Major” or act of God, since the former includes both natural as well as artificial and manmade unforeseen events. In Dhanrajamal Gobindram V/S Shamji Kalidas & Co, the Supreme Court has noted the distinction between force majeure and vis major or act of God. The Supreme Court has noted - “ 17. Mc Cardie, J. in Lebeaupin V/S. Crispin [ 1(1920) 2 KB 714] has given an account of what is meant by “force majure”, with reference to its history. The expression “force majeure” is not a mere French version of the Latin expression “Vis Major”. It is undoubtedly a term of wider import. Difficulties has arisen in the past as to what could legitimately be included in “force majeure”. Judges have agreed that strikes, breakdown of machinery, which, though normally not included in “vis major” are included in “force majeure”. An analysis of rulings on the subject into which it is not necessary in this to go, shows that where reference is made to “force majeure”, the intention is to save the performing party from consequences of anything over which he has no control. This is the widest meaning that can be given to “force majeure”, and even if this is to be the meaning, it is obvious that the condition about “force majeure” in the agreement was not vague”.

It is clear now that the effect of both these terms is basically to prevent a nonperforming party from being liable for a breach of contract and also saving the nonperforming party from the consequences of something over which it has no control at all.

The test for “force majeure” usually requires the satisfaction of three ingredients, namely : 1. Event must be beyond the reasonable control of the affected party; 2. The affected party’s ability to perform its obligations under the contract must have been prevented, impeded or hindered by the event; 3. The affected party must have taken all the reasonable steps to see to avoid or mitigate the event or its consequences.

Indian Law & Force Majeure

Force Majeure often gets mixed up with the doctrine of frustration of contract. In fact these are totally different concepts. The concept of force majeure has not been defined and also not specifically dealt with under the Indian statutes. The legislature has dealt with this concept to some extent in Section 32 of the Indian Contract Act, 1872, which deals with contingent contracts. Section 32 reads as follows :

“ 32. Enforcement of contracts Contingent on an event happening - Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”

Doctrine of Frustration

Section 56 of the Indian Contract act,1872, deals with the doctrine of frustration. Section 56 reads as follows :

“56. Agreement to do impossible act.

Contract to do an act afterwards becoming impossible or unlawful - A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent from becoming unlawful, becomes void when the act becomes impossible or unlawful. Compensation for loss through non performance of act known to be impossible or unlawful.

Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promise for any loss which such promise sustains through the nonperformance of the promise”.

Thus Section 56 deals with two aspects, namely, a) It renders void all agreements to do impossible acts; and b) It envisages a situation wherein a lawful act has subsequently become impossible or unlawful to perform.

Thus the fundamental ingredients of Section 56 of Indian contract act, 1872, are :

• There must be a valid contract;
• The performance of a contract is yet to be made or is ongoing; and
• The performance becomes impossible on account of facts or law.

From the above discussion with regard to ingredients of section 32 and Section 56 of the Indian Contract Act, 1872, it is to be noted that where the contract itself, as a matter of construction, contains impliedly or expressly a term according to which it would stand discharged on the happening of certain events, the question of dissolution of contract as per its terms and conditions falls to be determined under Section 32 and not under Section 56 of the Indian Contract act, 1872.

Distinction Between Force Majeure & Doctrine of Frustration

A force majeure clause may include acts of Government, war or any other events or circumstances as may be incorporated by the parties in the contract prior to its execution. In order to claim the benefit of force majeure, a party shall have to fulfil the conditions specified in the force majeure clause. The contract is not terminated but performance of the contract is suspended during the period when the event constituting force majeure exists and continues. After such force majeure event ceases to exist, the party to the contract who has taken benefit of this force majeure clause has to perform its part of contractual obligation. In the event of failure of the party who has to perform its part of contractual obligation post the force majeure event, the other party shall have the right to terminate the contract. Thus force majeure is a contractual remedy and the terms and conditions constituting force majeure are determined by the parties to the contract prior to the execution of contract.

On the other hand frustration of contract is the happening of an act, after the execution of contract, outside the contractual terms and conditions and such an act makes the performance of contract impossible. Under Indian Contract Act, 1872, the doctrine of frustration of contract is that aspect of the law of discharge of contract under Section 56 of the Indian Contract act, 1872, by reason of supervening impossibility or illegality of the act agreed to be done. On the other hand Section 32 envisages the impossibility of performance leading to avoidance of contract, it does not statutorily cover the unforeseen contingencies and circumstances which result in temporary suspension of performance and upon cessation of such a contingency resumption of contract. Thus the bottomline to the provision under Section 56 is ‘impossibility’.

COVID-19 Lockdown,Section 32 & Section 56 of Indian Contract Act,1872, & Force Majeure

Government of India vide its Memo No. F. 18/4/2020 PPD Did. 19/02/2020, Ministry of Finance, conveyed - “ A doubt has arisen if disruption of the supply chains due to spread of Corona Vires in China or nay other country will be covered under force majeure clause. In this regard it is clarified that it should be considered as a case of natural calamity and force majeure clause may be invoked wherever considered appropriate, following due procedure”.

It is clear that this memo issued by the Ministry of Finance gives rise to force majeure in respect of contracts dependent on supply chains. In the circumstances the courts in India may apply similar principle in all commercial contracts. Hence the issues which may come up for consideration are as follows:

• Whether force majeure clause is present in the contract in question; and
• Whether COVID-19 pandemic has affected the fundamental basis of the contract.

Thus the above-mentioned memo does not provide a blatant protection to all commercial contracts. In the circumstances mentioned above if there lies a force majeure clause in the contract in question, the affected party may invoke force majeure clause. But if the contract in question does not contain a force majeure clause, then it will amount to frustration of contract under section 56 of the Indian contract Act,1872.

It is now clear that if contractual parties wish to take benefit of force majeure it will depend solely on the contractual provisions. The events which constitute force majeure will ultimately ascertain whether the performance of contractual obligation may be suspended or will stand frustrated. The supreme court of India in its decisions from Satyabrata Ghose V/S Mugneeram Bangur & Co [1954 SCR 310: AIR 1954 SC 44] to Energy Watchdog V/S. CERC [( 2017) 14 SCC 80)], has held that when a force majeure event has causal connection to a clause, express or implied, in a contract, it is governed by Section 32 of the Indian Contract act,1872, whereas if a force majeure event happens which is outside the contractual terms, section 56 of the Indian Contract Act, 1872, will be applicable.

In Satyabrata Ghose v/S. Mugneeram Bangur & Co[1954 SCR 310: AIR 1954 SC 44], the Supreme Court has held that:

“9. The first paragraph of the Section lays down the law in the same way as in England. It speaks of something which is impossible inherently or by its very nature, and no one can obviously be directed to perform such an act. The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done. The wording of the paragraph is quite general, and though the illustrations attached to it are not at all happy, they cannot derogate from the general words used in the enactment. This much is clear that the word “impossible” has not been used here in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view the object and purpose which the parties had in view, and if an untoward event or change of circumstances totally upsets the very foundation upon which the parties rested their bargain, it can very well be said that the promisor finds it impossible to do the act which he promised to do”.

In Naihati Jute Mills V/S. Khyaliram Jagannath [(1968) 1 SCR 821)], the Supreme Court has observed:

“ 7. …….. The court can grant relief on the ground of subsequent impossibility when it finds the whole purpose or the basis of the contract was frustrated by the intrusion or occurrence of an unexpected event or change of circumstances which was not contemplated by the parties embodying a provision for discharge because parties did not think about the matter at all nor could possibly have an intention regarding it. When such an event or change of circumstances which is so fundamental as to be regarded by law as striking at the root of the contract as a whole occurs, it is the court which can pronounce the contract to be frustrated and at the end. This is really a positive rule enacted in Section 56 which governs such situation”.

In DDA V/S. Kenneth Builders (P) Ltd (2016) 13 SCC 561, the Supreme Court has held:

“ 30. The interpretation of section 56 of the Contract Act came up for consideration in Satyabrata Ghose V. Mugneeram Bangur & Co. It was held by the court that the word “impossible” used in Section 56 of the Contract act has not been used in the sense of physical or literal impossibility. It ought to be interpreted as impracticable and useless from the point of view of the object and purpose that the parties had in view when they entered into the contract. This impracticability or uselessness could arise due to some intervening or supervening circumstance which the parties had not contemplated. However, if the intervening circumstance was contemplated by the parties, then the contract would stand despite the occurrence of such circumstance. In such an event,” there can be no case of frustration because the basis of the contract being to demand performance despite the happening of a particular event, it cannot disappear when the event happens”.

In Energy watchdog V/S. CERC [(2017) 14 SCC 80], the Supreme Court has observed that:

“ 36. The law in India has been laid down in the seminal decision of Satyabrata Ghose V/S. Mugneeram Bangur & Co. The second paragraph of Section 56 has been adverted to, and it was stated that this is exhaustive of the law as it stands in India. What was held was that the word “impossible” has not been used in the section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an unforeseen event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do. It was further held that where the court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Act. If, however, frustration is to take place dehors the contract, it will be governed by Section 56”.

In these circumstances following aspects should be considered before taking appropriate legal steps:

• Check the contract to ascertain whether the contract includes a force majeure clause;
• Ascertain those terms of contract that the party is unable to perform;
• If the contract contains force majeure clause, section 32 of Indian Contracts act, 1872, is attracted.

If the party successfully establishes the force majeure clause in the contractual terms, then it will be relieved of its obligation to perform its contractual promise during the time the supervening force majeure event continues. The performance of contractual obligation under the contract in question would then be suspended and the party shall be relieved of its liability to pay damages for breach of contractual terms. If the contract does not contain force majeure clause then in that event Section 56 of the Indian Contract Act, 1872, will attract.

There is no slightest doubt that contracting parties could not have foreseen a pandemic like COVID-19, followed by a situation of lockdown for more than sixty days. A complete halt of procurement of raw material, manufacturing and supply activity resulting in complete economic shut down. The onus of demonstrating whether COVID-19 did affect the performance of the contractual obligation in any particular case will lie heavily on the party seeking to have its non-performance excused.

In the light of this discussion it would be pertinent to take note of two recent decisions, of High Court at Delhi and High Court at Bombay. The Delhi High Court in Halliburton Offshore Inc. V/S. Vedanta & Anr [ O.M>P> (I) (COMM) 88 of 2020 & I.A> 3697 of 2020] had restrained the invocation of bank guarantees given by the petitioner to Respondent- Vedanta on premise of special equities, irretrievable harm and prima facie finding that lockdown is in nature of force majeure. The Delhi High Court while granting interim relief held that the respondent was injuncted from invoking the bank guarantees of the petitioner. This interim order of the Delhi High is certainly a step in evolving the jurisprudence in the direction so as to interpret whether a contract having a force majeure clause would cover restrictions in movement and lockdown condition imposed by the Central and State Governments.

Where as High Court at Bombay in Standard Retail Pvt. Ltd V/S. G. S. Global Corp. & Ors [ COMM. ARBP (L) No 404 of 2020], while dismissing a Commercial Arbitration Petition, has held that, “lockdown is these unprecedented times, is not a legal basis for termination or repudiation of a contract”. The Bombay High Court observed that, " d. The Notifications/Advisories relied upon by the learned Senior Counsel for the Respondent No 1 does suggest that the distribution of steel has been declared as an essential service. There are no restrictions on its movement and all ports and port related activities including movement of vehicles and manpower, operations of Container Freight Stations and warehouses and offices of custom Houses Agents have also been declared as essential services". The High Court has also observed that, " e. In any event, the lockdown would be for a limited period and the lockdown cannot come to the rescue of petitioners so as to resile from its contractual obligations with the Respondent No 1 of making payments".

Therefore one must make a note that proving frustration in court would not be an easy task since courts may interpret the COVID-19 pandemic as ‘mere hardship’ and nothing more. Hence the party desirous of taking benefit of the force majeure clause must retain evidence with respect to impossibility of performance of contractual obligation. The COVID 19 pandemic has necessitated a careful examination of contracts for the force majeure clauses since, what may pose as a force majeure event in some cases can not be assumed to apply automatically to every contractual obligation .

It is unfortunate that the Government is not coming up with absolute clarity on the issue.The need of the hour is to enact a law that provides clarity on situations related to force majeure during the COVID -19 pandemic, which is likely to stay with us for a long time to come.