Judicial Approach On Force Majeure Due To COVID-19 Pandemic

Author: Aaksha Sajnani United World School of Law, Ahmedabad

With the Coronavirus outbreak, the economies across the world have suffered from a massive downturn. The World Health Organization had officially declared this period as Health Crisis or Pandemic on 11 March 2020. The Government of India has implemented lockdown since 24th March 2020 as a measure to prevent the spread of the novel coronavirus. The pandemic has brought an extremely uncertain period in the lives of people as well as in the business frontier. The possibility of breach of contracts is at its peak at this point because only essential commodities are accessible in the market right now and the supply chain of other products and services is disrupted. Therefore, people may not be able to fulfill their contractual obligations. As a result, many parties to contracts are modifying or terminating their existing contracts. In order to prevent such situations the contracts mention a clause that deals with “Force Majeure”. The term Force Majeure refers to an event that cannot be anticipated in advance and is not within control. It includes both aspects, the act of nature such as an earthquake, tsunami, or the act of people such as war, riots. It can be manifested under Section 32 and Section 56 of the Indian Contract Act, 1872 referring to the performance of an impossible act which makes the contract void. At present, the question that is being raised before the courts in India is “Whether the COVID-19 pandemic falls under the clause of Force Majeure? Whether the parties who are not able to perform their contractual obligations liable under breach of contract?”

Even though the Supreme Court of India has not remarked on the equivalent, the High courts in several cases have considered that the Covid-19 pandemic shall be covered under the Force Majeure clause in the view of the Indian Contract Act, 1872. Be that as it may, whether or not it is a substantial reason behind non-performance of a contract will rely upon facts of each case.

  1. Halliburton Offshore Services v. Vedanta Limited [1]

Facts of the case:

Halliburton was a drilling contractor for Vedanta. As per the contract, the petitioner had to drill three wells by 16 Jan, 16 Mar, and 16 June 2019 respectively and in case the petitioner fails to perform the contract within the stipulated time, the respondent can liquidate the bank guarantees. The petitioner was technically late for the performance of the contract but he obtained an interim injunction by the court to restrain the respondent to invoke the bank guarantee and sought extension of time for completion of construction until 31st March. However, shortly before the expiration of the extended time the petitioner gave notice to the respondent of Force Majeure due to the COVID-19 lockdown. The petitioner contended before the Delhi High Court that only 5% of the work is left to be completed and had it not been the lockdown the work would have been completed by 31st March. On 20 May 2020, the Delhi High Court issued an ad-interim order to further restrain the respondent from liquidating the bank guarantees.

Judgment:

On 29th May, the Court vacated the ad-interim order of restraining the respondent from liquidating the bank guarantees and held that the petitioner defaulted multiple times for the performance of the contract despite several opportunities. The contract could have excused the petitioner from performing his obligations if it was prevented or hindered by the pandemic.  However, every breach or non-performance of contract cannot be justified or excused merely due to a pandemic like Covid-19.

Therefore, past non-performance by the petitioner cannot be condoned and Force Majeure cannot be used as an excuse for non-performance of the contract.

  1. Standard Retail Private Limited v. M/s. G. S. Global Corp & Ors[2]

Facts of the case:

The petitioner had entered into a contract with Respondent No. 1. As per the contract, respondent no.1 had to deliver steel from South Korea to India. The contract was duly performed by respondent no.1. However, the petitioner filed a petition under Section 9 of the Arbitration & Conciliation Act, 1996 contending that due to the COVID-19 pandemic, the contract between the parties shall stand void on the ground of impossibility of performance of the contract under Section 56 of the Indian Contract Act, 1872. The petitioner further sought directions from the court to restrain respondent no.2 i.e. the bank to encash the letters of credit. Respondent no.1 submitted that he has performed his part of the contract and the goods have been shipped from South Korea and if the petitioner is under no obligation for his purchase, why should the respondents suffer the loss? Can the Force Majeure clause mentioned in the contract be invoked on the third party (Bank)?

Judgment:

The Bombay High Court held that lockdown cannot be used as an excuse for non-performance of the contract. In the present case, the distribution of steel is considered to be an essential service, and the movement of vehicles or manpower is not restricted by the government. Therefore, the performance of the contract was possible by the petitioner. The court rejected the petition stating that the Force Majeure clause can only be invoked by respondent no.1 and the petitioner cannot step back from his obligation in the name of the pandemic. Moreover, the court refused the ad-interim relief as the letters of credit are independent transactions with the bank and it has no relation with the dispute between the contracting parties.

  1. Ramanand & Ors vs Dr. Girish Soni & Anr[3]

Facts of the case:

In 2017, an order was passed by the Delhi High Court stating that incase the tenants who run a shoe shop in Khan Market, Delhi, commit default in the payment of rent to the respondents, the court shall pass an eviction order to vacate the premises that have been given to them on rent through a lease deed. However, due to the Coronavirus outbreak the tenants are not in a position to pay the rent of the premises. Consequently, an application for suspension of rent was filed before the High Court stating that the business activities of tenants are in losses, and due to Force Majeure event of the pandemic the tenants want suspension of rent or extension in time to abide by their obligations.

Judgment:

The court referred to the Supreme Court’s Judgment of Energy Watchdog v. CERC & Ors.[4], wherein the Hon’ble bench distinguished between Section 32 and Section 56 of the Indian contract Act, 1872, and observed that as long as there exists a provision of Force Majeure in the contract, Section 32 shall be attracted. However, wherein there is an absence of a clause in the contract that provides for an event that makes the performance of the contract impossible Section 56 shall be attracted. While interpreting the said judgment, the Delhi High Court observed that in cases where there is no contract between the parties and instead, the parties are bound by the lease deed, neither Section 32 nor Section 56 of Indian Contract Act, 1872 can be invoked. The tenants in the present case are having a lease deed with the respondent and therefore they shall approach the court under Section 108(B) (e) of the Transfer of Property Act, 1882 to invoke the Force Majeure. Nevertheless, Section 108(B) (e) cannot be invoked until and unless there is a full destruction of property and temporary non-use of premises cannot be construed to be a valid argument to declare the lease void. Hence, the High Court held that tenants cannot avoid payment of rent under Section 108(B) (e) of Transfer of Property Act, 1882. The application of suspension of rent stands to be rejected but some relaxation of payment can be granted owing to the lockdown.

  1. Hence, the COVID-19 pandemic is recognized by the courts under the Force Majeure clause of a contract. However, this cannot be used as an excuse for non-performance of the contract by the parties. In order to enforce this clause, the court shall be satisfied that the parties have taken all the reasonable measures to ensure the performance of the contract yet the circumstances did not permit so. The courts have established a hand in hand relationship between the pandemic and the non-performance of the contract.

[1] O.M.P. (I) (COMM) & I.A. 3697/2020

[2] Commercial Arbitration Petition (L) No. 404 of 2020” (decided on 08.04.2020)

[3] Before the Delhi High Court, CM APPL. 10848/2020 (decided on 21.05.2020)

[4] [2017] 14 SCC 80

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