FORCE MAJEURE AND COVID-19: PANEL DISCUSSION

Introduction to Force Majeure

 Even though what parties promise may be viable at the time of entering into the contract,
with time, change in circumstances might make it unviable for a party to perform its
promises
 Can the parties pre-empt such circumstances or the nature of such circumstances in
advance? If they can pre-empt such circumstances in advance, can they relief themselves
of such promises?
 To do so, the parties may make use of ‘force majeure clauses’!
 Force Majeure Clauses are framed such that these clauses relief the parties of their
promises upon happening of a particular event (usually influenced by a greater force).
 For contracts might be a way of risk allocation, within these contracts, Force Majeure
Clauses help in risk-mitigation

Statutory Regime: S.56 of ICA

 In India, contracts are governed by ICA. S.56 of the ICA provides
o “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, 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 promisee for any
loss which such promisee sustains through the nonperformance of the promise.”
 Simply put, the promises that become impossible/unlawful are relieved.

Tussle between Force Majeure Clauses and S.56

 Force Majeure – the Parties may want to include circumstances that make promises
‘impossible’ and ‘unviable’
 S.56 – covers the events that are made ‘impossible’.
 Do Force Majeure clauses provide for the events that make contracts ‘unviable’?
 Good Contract Drafting would require the parties to phrase ”what, who, whom, when,
why and how” into their obligations. Would the fact that ”what, who, whom, when, why
and how” is also etched as a promise allow the circumstance to come under S.56?

Roadmap
 Covid 19 as Force Maejure in Contracts which do not have force majeure clauses
 Covid 19 as Force Maejure in Contracts with force majeure clauses which are silent on
Epidemics/pandemics
 Covid 19 as Force Majeure in Contracts which expressly include epidemics/pandemics
 Covid 19 as Force Maejure in Contracts which expressly exclude epidemics/Pandemics
  Case law on covid 19 as force majeure in India - Samiksha
 Commercial Impact of Force Majeure Clause in Covid-19 & Lessons for Contract
Drafting - Sourav

 56. Agreement to do impossible act.—An agreement to do an act impossible in itself is

void.
 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, unlawful, becomes void when the act
becomes impossible or unlawful.1
 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 promisee for any
loss which such promisee sustains through the non- performance of the promise.

 When can S.56 be invoked?

There must be a valid contract; The performance of the contract is yet to be made or is
ongoing; and; The aforesaid performance becomes impossible by way of facts or law.

Effect of invoking S.56 – contract is declared void; puts the clock back for contracting parties
Certain aspects to be considered before invoking/ refuting a S.56 claim:
 Best endeavours
 Termination
 Renegotiation
 Restitution
 Dispute Resolution

 Covid 19 as Force Majeure in Contracts which expressly include epidemics/ pandemics

 Mansi Gupta
 Sample Clause
 “Force Majeure events means/include fire, floods, epidemics, pandemics and strikes that
materially affect the performance of the parties to the contract”

 Covid 19: A Force Majeure Event?

 World Health Organisation (WHO) officially declared the corona virus outbreak as a
“pandemic” on 11-3-2020.
 19.02.2020: Finance Ministry issued an office memorandum “Coronavirus should be
treated as a natural calamity and Force Majeure should be invoked, wherever
appropriate”
 Covid-19 as a Force Majeure event depends on the language of clause.
 where performance of the contract entered between them has become practically and
commercially impracticable on account of COVID-19 outbreak.
 What is to be proved?
 3 THINGS:
o the impediment is beyond reasonable control;
o { depends on the specifics of each case: due regard to nature of business}
o the impediment could not reasonably have been foreseen at the time of the
conclusion of the contract;
o {includes stay-at-home orders, travel restrictions, closure of non-essential
businesses and lockdowns}
o Covid-19 has made the performance of the obligations under the contract
impossible or impracticable;
o {specifc and depends on reasonable remedies available to party to overcome
consequences of pandemic}
o Mere difficulty or inconvenience is not force majeure.

 Burden of Proof
o Burden of proof lies on the party which invokes the force majeure clause.
o Related Documents:
o any notification and/or guideline issued by the national and/or state governments
imposing restrictions on trade,
o definite forms of information from reliable media sources related to COVID-19
outbreak, restrictions on public movement and/or mandatory shutdown of modes
of travel
o documents revealing any cancellations disrupting travel itinerary, such as
cancelled/rejected visa etc.
 Consequences
Depends on the obligations mentioned under the contract.
 Successful application:
 Section 32 invoked.
 Party relieved of its obligations to perform its obligations under the contract during
the time the supervening force majeure event subsists,
 the performance of the obligations under the contract are suspended and party is
relieved of its liability to pay damages for breach of contract.
 Effective measures to mitigate the impact of the pandemic by mutual understanding,
and/or by re-negotiating the terms and conditions of the contract.

 Consequences

o Could also result in the right to the other party to terminate a contract if the
force majeure event lasts longer than a particular period as stipulated in the
contract.
o frivolous and hurried claim can have adverse consequences: opposite party
may raise a dispute for breach of contract and/ or claim damages for non-
performance
 o What if parties have not complied with requirements under FM clause, can
Section 56 be enforced? — No, give effect to intention of parties.

Covid 19 as Force Majeure in Contracts that explicitly exclude epidemics/ pandemics

Sample Clause
 “Force Majeure events include fires, earthquakes, floods and other such natural
calamities that materially affect the performance of the parties to the contract. Any
epidemics / pandemics will not amount to a Force Majeure event”.

 Claims of Impossibility
o If the FM clause of this nature in the contract, parties cannot resort to Section 56
to claim supervening impossibility and suspend/ dispense with obligations

 Covid as a natural calamity

o Even if epidemics/pandemics are excluded, most force majeure clauses include
“natural calamities” as instances of force majeure events

 Office Memorandum No. F. 18/4/2020-PPD, dated February 19, 2020, issued by the
Ministry of Finance (Dept. of Expenditure), advises that the outbreak of COVID-19 is to
be considered as a “natural calamity”

 Although this is merely an advisory note issued by the Ministry, it will have persuasive
value in the characterisation of COVID-19 as a “natural calamity”.

 Scope
 May not include the consequences flowing out of the excluded pandemic
 Measures taken by the State or Union Government in response to the pandemic
arguably constitute force majeure events independently
 Boils down to intent of the parties

 Risks
 Parties may be unable to fulfill their obligations in certain circumstances. Litigation/
re-negotiation of the contract may be necessary.
 Inability of parties to raise force majeure claims if the situation significantly worsens
due to waves or other circumstances.
 Commercial Viability
 If the contracting parties are extremely confident in their ability to make good on their
obligations
 If the pandemic has no bearing on the obligations of the contracting parties

 Covid 19 as Force Majeure: in Contracts with force Majeure Clauses that are silent on
‘Epidemics’
  ◦Those clauses that exhaustively list out what events would be act as force majeure –
Example would be: “Force Majeure events means fire, floods and earthquakes that
materially affect the performance of the parties to the contract.”

 ◦For invoking Covid 19 as force majeure, a party will have to rebut the presumption that
an Epidemic was intentionally excluded from the list of the events, in order to get the
benefit of S.56.

 ◦Such party may argue how an Epidemic affecting the root of the contract was beyond the
contemplation of parties. It may refer to the memorandums exchanged during
negotiations or rely on its obligations under the contract and show how an epidemic that
could have affected the same was beyond what was foreseeable to the parties.

Inclusive Force Majeure Clauses

 ◦The more common clause - typically includes both a list of specific events and an open
ended phrase such as “such other events beyond the control of parties” or “act of god” –
which is designed to cover events not specifically listed in the clause. Example – “Force
Majeure events includes fire, floods, strikes and other such natural calamities/acts of God
that materially affect the performance of the parties to the contract”
 ◦In case, the words ‘epidemics or diseases’ is not mentioned, but the clause contains an
open ended phrase, then the phrase would raise a question of interpretation to be decided
by the court that whether Covid 19 would fall within its scope.
 Courts apply the Rule of ejusdem generis to construe such clauses narrowly– that when a
list of specific items belonging to the same class is followed by a general word, the
general words are to be treated as confined to other items of the same class

 Additional Points
 As demonstrated in the Bombay High Court judgement in the Steel Industries Case,
successful invocation of force majeure clauses entails a fact-specific analysis and will
hinge on the exact nature of obligations of the parties and whether the force majeure
event is actually precluding the same.
 However this has not been applied consistently such as in the Rural Fair Price
Whoelsale Ltd. And Anr. v. IDBI Trusteeship Services Ltd., IA No. 1/2020

 ◦There may be other aspects to the Force majeure clause, such as “Best/Reasonable
endeavours” – which require parties to make attempts to perform the contract to the
extent possible. There may also be notice, Re-negotiation and Restitution requirements.

 Additional Points
 ◦In case of government contracts, the Finance Ministry has clarified in Office
Memorandum No.F. 18/4/2020-PPD, that Covid19 shall be considered as a case of
“natural calamity”, so parties can take benefit of this.

 ◦ The outcomes for Contracts entered into post March 2020, when the pandemic became
universal knowledge, may be different. The fact that whether a second wave and
lockdowns could have been reasonably anticipated will be relevant in this case.

 M/s Halliburton Offshore Services Inc vs Vedanta Limited

 •One of the earliest judgements wherein the High Court of Delhi specifically held
COVID-19 to be a force majeure event.
 •In this case, the force majeure clause in the contract covered epidemics and pandemics
and thus non-performance could have been justified due to the outbreak of COVID-19.
 •However, the Court said that the force majeure clause had to be interpreted narrowly and
that every breach could not be justified merely on the invocation of COVID-19 as a force
majeure event.
 •Held that the party would not be entitled to take the benefit of the force majeure clause if
there is a breach from before the COVID-19 period.

 Standard Retail Pvt Ltd. vs M/s Global Corp

 •The Bombay High Court recognized COVID-19 as a force majeure event.
 •However, the High Court held that the force majeure clause was only applicable to the
respondent and not the petitioner.
 •The Court considered the circumstances of the case and stated that mere hardship in
performance of an obligation in view of the COVID-19 pandemic could not be
considered a valid objection against the respondent.
 •Since the lockdown was temporary and only for a limited period, the petitioners could
not use it as an excuse to resile from their contractual obligations.

 MEP Infrastructure Developers Limited vs South Delhi Municipal Corporation

 •This case dealt with the force majeure clause in construction contracts where epidemics
were not included within the clause.
 •The Ministry of Road Transport and Highways had classified COVID-19 as a force
majeure event in May 2020. The respondent had also notified COVID-19 as a force
majeure occurrence in its circular.
 •The High Court held that once a party has acknowledged the prevalence of a force
majeure situation, it cannot challenge the non-performance of the contract which is
impacted by the pandemic.
 •It also observed that since the pandemic has been explicitly classified as a force majeure
event, there would be no requirement for a separate notice postulating the occurrence of
the force majeure event.

 “including, but not limited to”

 “any cause/ event outside the reasonable control of the parties”
 “any cause/ event that cannot be expected with reasonable foresight”

 Way Forward
o Efficient use of ejusden generis
o Terms preceding the catch-all phrase is very important.
o The terms preceding the catch-all should be of such nature that it gives broadest
scope.
o Customer’s POV
o The suppliers have found themselves in difficult position and have invoked force
majeure clause.
o Thus, a customer will typically want a tightly drawn clause, in order that a vendor
can less easily wriggle out of its contractual obligations.

 An example of tightly drawn force majeure

 ‘Force majeure means any event or sequence of events beyond a party’s reasonable
control and, that could not have been reasonably anticipated or avoided, and which
prevents it from performing its obligations under this Agreement including, but not
limited to:
 an act of God, fire, flood, drought, earthquake, windstorm or other natural
disaster;
 a pandemic…

 The list of events preceding the ‘catch-all’ clause must be tightly drawn.
 Vendor’s/Supplier’s POV
o Broadly framed force majeure clause
o Use of terms such as ‘prevented’, ‘delayed’ or ‘hindered’. This is far wider than
simply just stating that performance should be ‘prevented’ -
o Economic Hardship Clause: The vendor may instead prefer to negotiate an
‘economic hardship’ clause into its contracts. This provides the vendor with some
protection if it is forced into a disadvantageous economic position as a result of a
COVID-19-type crisis.