COVID 19: Force Majeure And Arbitration

Author: Aryan Chaudhary New Law College, BVDU, Pune Editor: Sri Hari Mangalam The West Bengal National Law University of Juridical Sciences, Kolkata

Introduction

The rapid spread of the Corona Virus has significantly affected the expansion process of different industries as well as their contractual obligations. Covid-19 has already been described as a pandemic by the World Health Organisation(WHO). Litigation already was an expansive and time consuming process, but due to the pandemic of such large scale, all the judiciary systems of the world  had been halted for a period of time and are only now beginning to recover, at incredibly sluggish rates. . . Like litigation, other forms of dispute resolution methods are also affected by this outbreak. Consequently, in today’s day and age, when all the businesses are working on the basis of strict contractual obligations, it has been difficult for many people to fulfill their obligations due to lack of business opportunities.

It has seemingly become  necessary to invoke force majeure clauses and apply the doctrine of frustration to provide some kind of relief.

Force Majeure and Arbitration in India

Arbitration is already in its developing stages in India. Not many Indian Businesses or Companies opt for Arbitration as a method of dispute resolution. This is due to lack of knowledge and/or ignorance towards the ability of this method of dispute resolution. Whatever may be the real reason, there is a strong need to create awareness towards Arbitration.

The Supreme court of India has clearly laid down that to invoke force majeure there is an utmost need that performance of the contract must be fairly impossible, and not just merely difficult..  Under Indian contract law, the Supreme Court in Energy Watchdog v. Central Electricity Regulatory Commission clearly laid down that only those events, which are explicitly included in the contract, can excuse a party from performance. That means, a force majeure clause, will be strictly interpreted, at all times.

Indian Contract Act; however, doesn’t deal with or exclusively mention force majeure as a part of its statutes, apart from a few  references in section 32, no other such provision is available.

During this pandemic, it must be a necessary step for businesses to include force majeure as well as arbitration clauses in their contracts. This is mainly useful in case some unforeseen events arise, and a party, in case of a dispute, is unable to approach the court of law when it is in need of a swift dispute resolution method.

The main hindrance for the businesses who want to benefit from frustration is to exhibit that the nature of their contractual obligations are permanent and impossible to deal with. The

Impact of Covid-19 on day to day life, like shutting down of businesses, quarantine, lockdowns, etc. all seems to be temporary and so, would not necessarily mean that the companies and other businesses would be exempted from the obligations of the contract.

Absence of Force Majeure clause in Contracts

In case of absence of Force Majeure clause in the contract between parties, the concerned party has to prove to the court that the nature of the contract falls under the section 56 of Indian Contract Act, 1872, which includes Agreement to do impossible act. The term ‘impossible’ refers to not only physical and literal impossibility of the contract rather the practical aspect of the task under the contract. For a contract to come under scope of section 56,  there should be an absolute impossibility that the contract has changed in essence.

In A.F. Ferguson & Co. v. Lalit Mohan AIR 1954 Pat 524, the Patna High Court held that where due to out-break of war the performance of the contract by the insured by making payments of premium to the enemy insurance company with whom he was insured became impossible and illegal under rule 104, defence of india rules, 1939, the contract became frustrated and void under section 56 contract act.

Force Majeure Vs. Frustration

Force Majeure, as explained above, refers to a common clause in contracts, that basically liberates either party to the contract from obligations when an unprecedented circumstance arises outside the control of the parties. These extraordinary events or circumstances include war, riots, epidemics, strike, or any ‘Act of God’. Whereas, Frustration on the other hand, is an English law doctrine, according to which the performance of a contract can be set aside when an unforeseen event/circumstances arrives or the parties principle motive or intentions are rendered impossible to achieve.

Unlike Force Majeure, Doctrine of frustration is not needed to be added to a contract. The parties can simply invoke this doctrine, upon the fulfilment of certain conditions.

Nevertheless, if force majeure clause is mentioned in the contract, it will be applicable. But, the court may also find doctrine of frustration applicable in certain situations, which the force majeure provision doesn’t include.

Force Majeure And Frustration Under English Law

Force Majeure under English Law is not a recognised legal principle however, to gain Force Majeure relief in the contract, the parties must prove before the court of law what accounts for Force Majeure. If in case the parties to the contract fail to prove or show the necessary, the contract will not fall into the category of Force Majeure of performance.

Nonetheless, Due to the Covid-19 outbreak, performance of the contract can be excused if there is an explicit mention to a similar situation, or a contract that might include words like epidemic, pandemic, and/or quarantine.

If in case, no force majeure clause is mentioned in the contract, then Doctrine of frustration can be evoked. Doctrine of frustration  discharges the parties from contractual obligations under some unforeseen circumstances. Frustration involves two aspects: contractual obligation rendered impossible and the party’s principle intention changes, for which they had entered into the contract. According to English Law, a contract could also be discharged on the ground of frustration, when something occurs after the formation of a contract, i.e. an unforeseen event or unanticipated change in circumstances.

Though, it should be noted that sheer inconvenience, hardship, financial loss involved in performing the contract or hold up, which is within the risks of the undertaken contract, does not amount to frustration.  This means, if a business suffers losses or hardship during a normal course of a business, then such mere hardships will not fall under the purview of frustration.

Force Majeure And Hardship Under French Law

Article 1218 of the French Civil Code deals with the concept of force majeure and obligations of the debtor. For the defendant to conjure force majeure, he/she must fulfil three conditions:

1)    Externality

The defendant must not be involved in circumstances leading upto the event.

2)    Unpredictability

The event must be unforeseeable.  In case of a foreseeable event, the defendant is obliged to be prepared for it. Being not prepared for a foreseeable event leaves the defendant culpable.

3)    Irresistibility

The outcome of the event must be inevitable.

Force majeure is applicable throughout French Law and is a defence against liability.

Conclusion

The author through this article is trying to convey that the courts around the world provide relaxation in cases relating to force Majeure and Doctrine of Frustration whereas, in India stricter rules are followed and it has made it very difficult for the parties to seek relief under the same. In case of arbitration proceedings, if one of the parties tries to seek relief under Force Majeure and doctrine of frustration and even if, award is passed in favour of the party. The other party still has the remedy to seek the assistance of the court which at the first place defeats the whole process of arbitration. The finality of arbitral awards in matters of force majeure and Doctrine of frustration and lesser burden on the parties to prove the same, these are the two lacunae that must be addressed by the courts and for which legal provisions are required, if the same are not present in the arbitration agreement/clause.

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