4 May 2020
Introduction
The onset of the Covid-19 pandemic in India has proven not only to be a humanitarian crisis, but also an economic crisis of an unprecedented scale. Specifically, restrictions on movement of persons and goods, save for those involved in essential services, have raised serious doubts on the ability of parties to perform their obligations under contracts when these are not ordinarily classified as ‘essential services’. Uncertainty as to the performance of contracts has led to parties envisaging breaches of contract and assessing their rights and remedies in relation to the same.
Force Majeure and Vis Major
, ‘Force Majeure’ means an “event or effect that can be neither anticipated nor controlled . . . [and] includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).”[1]
‘Vis Major’ (meaning ‘Act of God’ in Latin) is defined as an “overwhelming, unpreventable event caused exclusively by forces of nature, such as an earthquake, flood, or tornado.” [2]
‘Force Majeure’ is wider than ‘Vis Major’/ ‘Act of God’ since the former encompasses both natural and artificial unforeseen events whereas the latter contemplates only natural unforeseen events. In fact, ‘Vis Major’/ ‘Act of God’ actually forms a sub-set of ‘Force Majeure’. The Supreme Court has, in Dhanrajamal Gobindram v. Shamji Kalidas & Co.,[3] recognised the distinction between ‘Act of God’/‘Vis Major’ and ‘Force Majeure’.
Notwithstanding the differences, the effect of both the terms is to excuse non-performance of a party and prevent a party from being liable for a breach of contract[4] whilst also saving the non-performing party from the consequences of something over which it has no control.[5]
Force Majeure Clauses in Contracts
Contracts often contain a force majeure clause that is negotiated between parties and specifies the events that qualify as force majeure events such as, acts of god, wars, terrorism, riots, labour strikes, embargos, acts of government, epidemics, pandemics, plagues, quarantines, and boycotts.
If the event that is alleged to have prevented performance under the contract, such as an epidemic, is specifically mentioned in the force majeure clause and the event occurs, then the affected parties may be relieved from performance.
Even if such event is not specifically mentioned in the force majeure clause, many force majeure clauses contain a catch-all phrase that is in addition to the specifically mentioned events. A catch-all phrase would have similar language to “including, but not limited to” or “any cause/ event outside the reasonable control of the parties”. Although such catch-all language is construed ejusdem generis[6], depending on the width of the language of the catch-all phrase, it could be argued that an epidemic/ pandemic like Covid-19 falls within the ambit of the force majeure clause. Even otherwise (i.e. even in the absence of such catch-all language), if ‘Vis Major’/ ‘Act of God’ has been specifically included as a force majeure event, it can be contended that an epidemic like Covid-19 is an ‘Act of God’.
Epidemic/ Pandemic = Act of God
Although Indian Courts have not directly ruled on whether an epidemic/ pandemic like Covid-19 is an ‘Act of God’, an argument to that effect can derive support from the decision of the Supreme Court in The Divisional Controller, KSRTC v. Mahadava Shetty[7], which holds that the expression ‘Act of God’ signifies the operation of natural forces free from human intervention with the caveat that every unexpected natural event does not operate as an excuse from liability if there is a reasonable possibility of anticipating their happening. Similar judgments have also been passed by the Madras High Court[8] and the Kerala High Court[9].
However, Courts in the United States of America and the United Kingdom have specifically held that the expression ‘Act of God’ includes a pandemic/ epidemic.
For instance, in Lakeman v. Pollard[10], a labourer at a mill left his job early during a cholera epidemic due to concerns of contracting the disease and, therefore, failed to complete his work contract. In an action by the mill owners seeking compensation for work done by the labourer, it was argued that the work contract had been breached. The Supreme Court of Maine held that the cholera outbreak was an ‘Act of God’ and the labourer was thus not in breach of his contract since duty to perform under the contract was discharged. Similarly, in Coombs v. Nolan[11], the District Court for the Southern District of New York excused a delay in the discharge of cargo where the defendant could not obtain enough horses to unload a ship on time due to a then prevailing horse flu pandemic on the ground that the horse flu pandemic fell within the ambit of ‘Act of God’[12].
In Sandry v. Brooklyn School District[13], the Supreme Court of North Dakota considered an appeal pertaining to claims by school bus drivers for their wages/compensation under their transportation contracts during the period that the schools were shut owing to the influenza outbreak. The Supreme Court of North Dakota discharged the school district from paying the bus drivers during the period that the schools were shut due to the influenza epidemic. It is pertinent to note that the reasoning was based on the fact that the contract had become impossible to perform due to the shut-down.
Under UK law, it has been held that the inability of a party to deliver an aircraft on time due to a pandemic causing a dearth of pilots fell within the catch-all residuary wording of a force majeure clause.[14]
Statutory Provisions under Indian Law and absence of a Force Majeure Clause
The Indian Contract Act, 1872 (“Act”) contains two provisions which are relevant to Force Majeure and Act of God. Section 32 of the Act deals with contingent contracts and inter alia provides that if a contract is based on the happening of a future event and such event becomes impossible, the contract becomes void. Section 56 of the Act deals with frustration of a contract and provides that a contract becomes void inter alia if it becomes impossible, by reason of an event which a promisor could not prevent, after the contract is made.
In a line of decisions starting from Satyabrata Ghosh v. Mugneeram Bangur[15] to Energy Watchdog v. CERC[16], the Supreme Court has held that when a force majeure event is relatable to a clause (express or implied) in a contract, it is governed by Section 32 of the Act whereas if a force majeure event occurs dehors the contract, Section 56 of the Act applies.
Hard Cases
Notwithstanding the above, there is considerable scope for complex fact situations which could throw up interesting issues, for instance, where the contract contains a force majeure clause that defines force majeure events in a restrictive manner (i.e. not specifically mentioning either pandemic/ epidemic or Act of God) and also does not contain any catch-all language. In such case, it could be argued that Section 56 of the Act can be pressed into service to excuse performance since the epidemic is not relatable to the force majeure clause in the contract[17]. If the party placing reliance on Section 56 of the Act is able to meet the high threshold of Section 56 of the Act and demonstrate that the very foundation upon which the parties rested their bargain has been totally upset[18], the Court can, in such a situation, consider the applicability of Section 56 of the Act.
Another instance is reflected in the recent decision of the Bombay High Court in the case of Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors.[19], where, while refusing an injunction as prayed, the Court noted that the force majeure clause was contained in the contract for sale of steel and not in the letters of credit. Although the injunction was refused on other grounds as well, it nevertheless highlights the difficulties that could arise when the underlying contract excuses performance but a separate / distinct ancillary contract/ financing arrangement like a letter of credit or bank guarantee does not contain a force majeure clause[20].
Causation and Mitigation
Even if a pandemic like Covid-19 falls within the ambit of a force majeure clause, that, by itself, would not relieve a party from performance of contractual obligations. The force majeure event must have a direct impact on the non-performance and the party seeking to rely on the force majeure event is also under duty to mitigate and/or explore alternate means of performance.
The judgment of the Orissa High Court in Sri Ananda Chandra Behera v. Chairman, Orissa State Electricity Board[21] provides some guidance on the causal link between the force majeure event and the resulting situation by citing, with approval, the decision of the House of Lords in Greenock Corporation v. Caledonian Railway Co.[22], where it was held that:
“…An accident may be an act of God if it has resulted directly from natural causes without human intervention. It is true that in most cases human and natural agency co-operate to produce the result, but the immediate and direct cause is alone to be looked at in determining whether the act is that of God or man. When a ship is cast away in a tempest, this would not have happened but for the act of the owner in sending her to sea but the loss is the act of God for all that.”
Complex issues pertaining to causal link could also arise where the immediate and direct cause is not the Covid-19 pandemic itself but the actions of authorities in response to the same, e.g. lockdown, curfew or restrictions on movement of people and goods. Such actions of authorities may, depending on the language of the force majeure clause, constitute a separate and independent force majeure event that excuses performance of a contract.
In the aforementioned recent decision of the Bombay High Court in Standard Retail (supra), the absence of a direct causal link between Covid-19 pandemic and the non-performance was one of the other grounds on which the Court refused to grant an injunction. An injunction restraining the encashment of letters of credit was sought inter alia on the ground that the underlying contract for sale of steel had become impossible to perform due to Covid-19 pandemic and the nation-wide lockdown. However, the Court observed that distribution of steel was an essential service and, since there were no restrictions on its movement, performance of the contract was not affected.
Another instance where the performance of a contract may not be affected due to Covid-19 pandemic is where employees of an organisation in the service industry have to isolate themselves at home. Depending on the nature of the service, it could be argued that since employees can continue working from home, there is no impact on delivery of services. Similarly, any non-performance due to an economic downturn or other general business conditions resulting from the Covid-19 pandemic are not likely to be sufficient to seek excuse from performance of a contract on ground of force majeure.
The language of the force majeure clause in a contract may also have a bearing on how direct the causal link between the force majeure event and the non-performance sought to be excused thereby must be. A clause that requires a party to be “prevented” by the force majeure event from performing its obligations will likely be construed as requiring a more direct and proximate causal link than one which only requires the party to be “impeded” or “hindered” in the performance of its obligations.
The force majeure clause (or, if the contract contains a ‘best efforts’ clause, then such a clause) may require parties to take reasonable efforts to perform the contract by alternate means. Even in the absence of an express provision, the party seeking to rely on a force majeure event to excuse its non-performance will have to demonstrate that it was unable to perform its obligations despite having taken steps to mitigate the effect of the force majeure event.
For instance, in Tsakiroglou & Co. Ltd. v. Noblee Thorl GmbH,[23] the House of Lords found that despite the closure of the Suez canal (the customary route for shipping the goods from Africa) leading to a longer and more expensive shipping route around the Cape of Good Hope, that the contract was not fundamentally altered, it had only become more onerous to perform, and as such, was not frustrated. Moreover, even in Coombs v. Nolan (supra), the Court took into consideration alternate means of performance of a contract. Particularly, the Court took into consideration that the defendant had attempted to acquire horses even from nearby localities and also offered to pay more than double the amount to acquire horses to load/unload the ships/freights.
Concluding Observations
While several contractual parties may seek to resile from the contractual obligations in light of the Covid-19 pandemic, successful reliance on either the force majeure clause in the relevant contract or on Section 56 of the Act for doing so is not a given. The onus of demonstrating whether Covid-19 actually affected performance of the specific contractual obligations in a particular case lies heavily on the party seeking to have its non-performance excused. While checking whether the Covid-19 pandemic (and/or actions by authorities in response thereto) fall within the scope of the relevant force majeure clause is a good starting point, issues such as causal link and duty to mitigate also need to be examined in order to assess the relative strengths and weaknesses of such party’s stand. Relevant letters and correspondence (including force majeure notices) should also meticulously document not just the fact that a force majeure event has occurred, but also the specific effects of the same on the contractual obligation which the party seeks to be excused from performing.
For further information, please contact:
Adarsh Saxena, Partner, Cyril Amarchand Mangaldas
adarsh.saxena@cyrilshroff.com
[1] Blacks Law Dictionary (11th Edition, 2019).
[2] Blacks Law Dictionary (11th Edition, 2019).
[3] AIR 1961 SC 1285.
[4] Phillips P.R. Core, Inc. v. Tradax Petroleum Ltd., 782 F.2d 314, 319 (2d Cir. 1985).
[5] Dhanrajamal Gobindram v. Shamji Kalidas & Co., AIR 1961 SC 1285.
[6] Md. Serajuddin v. State of Orissa AIR 1969 ORI 152 (Clause: any other happening which the lessee could not reasonably prevent or control); TGV Projects & Investments Pvt. Ltd. v. NHAI 2019 (173) DRJ 717 (Clause: an event or circumstances of a nature analogous to the other events or circumstances); Steel Authority of India v. Mercartor Lines Limited MANU/MH/2070/2012 (Clause: any other causes beyond the control of the Charterer)
[7] 2003 7 SCC 197; See also Province of Madras v. I.S and G Machado AIR 1955 Mad 519.
[8] P.K. Kalasami Nadar v. Ponnuswami Mudaliar, AIR 1962 Mad 44
[9] R.R.N. Ramalinga Nadar v. V. Narayana Reddiar AIR 1971 Ker 197 and Kerala Transport Co. v. Kunnath Textile, 1983 KLT 480
[10] 43 Me 463 (1857)
[11] 6 F Cas. 468.
[12] See also the decision of the District Court for the Southern District of Indiana in Rexing Quality Eggs v. Rembrandt Enterprises 360 F. Supp. 3d, 817 where the Court made an observation (although made in passing) that a drop in the supply of eggs due to the avian flu may be an act outside of the reasonable control of a party (and thus constitutes ‘act of god’); and SNB Farms Inc v. Swift & Company 2003 WL 22232881 where the District Court of the Northern District of Iowa (Eastern Division) held that Porcine Reproductive and Respiratory Syndrome affected hog production and triggered the Force Majeure Clause. However, the Court in this case held that due notice had not been given to the counter party of the force majeure event.
[13] 182 NW 689.
[14] Aviation Holdings Ltd. v. Aero Toy Store LLC, [2010] 2 Lloyd’s Rep 668.
[15] [1954] SCR 310; See also Alopi Parshad & Sons Ltd. v. Union of India, [1960] 2 SCR 793.
[16] (2017) 14 SCC 80.
[17] Energy Watchdog v. CERC (2017) 14 SCC 80
[18] Satyabrata Ghosh v. Mugneeram Bangur (supra)
[19] Order dated April 8, 2020 passed by the Bombay High Court in Commercial Arbitration Petition (Lodging) No. 404 of 2020.
[20] See however the Order dated April 20, 2020 passed by the Delhi High Court in Halliburton Offshore Services Inc. v. Vedanta Limited & Anr. O.M.P. (I) (Comm) & I.A. No. 3697 of 2020 and Order dated April 17, 2020 passed by the Delhi High Court in Ashwini Mehra v. Indian Oil Corporation Limited & Ors. in Writ Petition (C) No. 2966 of 2020 where the invocation and encashment of bank guarantees were stayed in light of the nationwide lockdown
[21] 1998 85 CLT 79.
[22] 1917 AC 556
[23] [1961] 2 All ER 179. (cited in Energy Watchdog (supra)), see also the decision of Coastal Andhra Power Limited v. Andhra Pradesh Central Power Distribution Company Limited. FAO (OS) No. 272 of 2012.
