The world is going through a huge crisis which has impacted the economic turnout of the business companies as well. The businesses are going through a huge global loss. Due to these unforeseen circumstances in the business field, several companies have gone bankrupt and have resorted to seeking the clause of ‘force majeure’. Businesses have suffered through several losses and damage in their revenues. There have been several delays in their scheduled projects and related payments. All of these unforeseen circumstances have been caused due to the lockdown during this pandemic. The lockdown has resulted in a rise in the unemployment rateas well as a breakage in the supply chain. Several companies have resorted to apply the clause of force majeure in their contract.
As per the definition of West’s Encyclopedia of American Law, force majeure relates to ‘ the law of insurance and is frequently used in construction contracts to protect the parties in the event that a segment of the contract cannot be performed due to causes that are outside the control of the parties, such as natural disasters, that could not be evaded through the exercise of due care’.
The Indian Contract Act, 1872 (“Contract Act”) does not explicitly define the term force majeure. It has some provisions which have been explained though in the Section 32 of the Contract Act, declaring contracts void due its incapability of being performed. These contracts are termed as contingent contracts. This is also termed along with Section 56 of the Contract Actthat deals with the agreement to do an impossible act or to do acts which, later on or gradually become impossible or unlawful.
The Supreme Court of India carefully interpreted the Section 56 of the Contract Act which mentions that the term impossibility does not arise due to physical limitation. Here, the limitation of the event is when the event was already any impossible act to which they had consented to. This is a typical example of a frustration of a contract. But, a contract would not be called frustration if the completion of it was in process and later on it was failed. The terms impossibility and frustration are two different terms. The principle of frustration is a term used to discharge the contract. The doctrine as per the Indian law of frustration lies on the Indian Contracts which have intervened to be impossible or illegal with respect to the Section 56 of the Contract Act.
Can the Pandemic be termed as a Force Majeure clause in India?
The Indian Government issued an Office Memorandum, on February 19, 2020, stating that Covid-19 is a natural calamityand the clause of force majeure shall be appliedin cases where it is necessary. This memorandum was with respect to several Government contracts and it would alsobe applicable to private contracts. In 2017, the Supreme Court of India stated that in caseswhere there are economic hardships, the Corporate companies cannot resort to force majeure. Covid-19 is, therefore, a natural calamity, or a pandemic as prescribed which will be applicable accordingly for theforce majeure defense. The Government hasapplied a case of lockdown in the whole country which is not a part of the force majeure clause. Hence, for the pandemic to be taken as a clause for force majeure, the Government would have to add lockdown as a clause for the event of force majeure. The pandemic or lockdown is not a criterion qualified forforce majeure if there is an option applicable to the parties to complete their operations over the digital platform or if there is any scope for the parties to complete the contract once the lockdown has been lifted.
The force majeure clause depends on two important criterions: nature of the obligation and if the parties are truly unable to discharge the obligations. Both of these criterions do not seem to be satisfied; hence, force majeure will not be applicableto either the lockdown orthepandemic. Giving the pandemic the term of ‘blanket force majeure’ is quite misleading as it would truly depend on the contractual obligation and the ways it is performed.
For instance, Quess East Bengal Football Club activated the decisionof Force Majeureafter April 30th. There were several clubs who activated this decision as football leagues were cancelled due to the pandemic and they were incurring heavy losses. In Europe, other football clubs who faced a similar situation did not invoke this clause but rather reduced the salary of the people working for the club. Quess’ decision is seen to be faulty and was not unanimously made. It wasn’t a properly considered decision made by them. The Club was already going through some financial loss before the pandemic hit it. Another example would be for the company of OYO (also known as OYO homes & hotels). This is an Indian chain for hospitality purposes that has leased several hotels and its franchises. It has been severely hit due to the pandemic because people had stopped commuting and hence, the business was running in a huge loss. Ritesh Agarwal, the founder, decided to forgo his salary and help in leading his business back to success. OYO has seeked the force majeure clause since they were unable to pay their partner hotels. They had to halt all their payments and therefore,seeked force majeure. Their decision was heavily criticised. Mr. Agarwal has said that the Company holds the right to terminate these partnerships if the situation worsens. He also stated thatOYO will not be able to make payments under the new agreement in case hotels are being used for essential services under the government or healthcare authorities orders.
In cases of any default in the lease agreement, the Court has to look at the provisions in the Transfer of Property Act, 2882 (“Property Act”). As per the provisions of Section 108 (e) of the Property Act,,a lease agreement will be held void if any material part of the property has been wholly destroyed or rendered substantially or permanently unfit for the purposes for which it was let out. Covid-19 did not satisfy the terms of this provision in any way. One cannot claim force majeure in the lease agreement as Covid-19 makes no lease premises unfit for any individual on a permanentbasis.
How does Indian Contract Act define the Doctrineof Frustration ?
The doctrine of frustration under the Indian law is a part of Section 56 of the Contract Act.For force majeure to be applicable during this pandemic, it has to be seen that an act is rendered impossible, unlawful or impractical. If any of these three criterions is fulfilled, then the contract will become void. Incircumstances wherethe contract has no way of being completed, it will be declared void and none of the parties will have the right to sue each other for their wrongdoings. The contract would lead to an immediate termination and there would be no need of any rectification. None of the parties are responsible tobear any costs regarding the loss or damage caused by them as per the terms of Doctrine of Frustration. This doctrine is to be used by the Court as a last resort in cases where there is no space for negotiation. This doctrine will not be applicable in cases where itcan be used for deceiving the other party. The Court will force the deceiving party topay up all the cost of damages occurred.
Consequences in terms of incorrect use of force majeure:
The clause of force majeure has hardly ever been used in the Indian Courts because the Indian Courts are always in favor of completion of Contracts. When a party claimsthe defense of force majeure, the burden lies on them to prove that there is no way for them to complete the terms of the Contract as mentioned. The Court does not take defense of Force Majeurefor an answer, if there is even the slightest scope for the contract being completed. Aswitnessedduring lockdown, if the lockdown is just for a short period of time and the Contract can be completed in the near future, then this defense would be insignificant. If there is a scope for completing the Contract over online mode, the clause of force majeure will not be applicable to the parties. The Court will automatically dismiss the applications in both the cases as there was a slight chance for the Contract to be acted on. Delay on contracts will not mean that the contract will become an example of doctrine of frustration. There would have to be a strong and definite reason for the contract to become impossible and get terminated. The Court has levied damage costs upon the parties who have seeked the claim for force majeure and have done wrong to the other parties by causing any inconvenience or delay.
Recent cases which have taken the defense of Force majeure:
- In the case of Rural Fairprice Wholesale Ltd. & Anr. vs IDBI Trusteeship Services Ltd. & Ors,, TheBombay High Court observed that the share market was dippingdue to the pandemic, and hence, this was an appropriate case for the bank to restrain themselves from acting on any ongoing sale and to withdraw from any pending.
- In the case of Indirajth Power Private Limited v. UOI & Ors, the petitioner’s demand for failure of paying up of bank guarantee due to Covid-19 was rejected. He was already given an extension of 12 months and there was no restrain on him to pay up.
The clause of force majeure is applicable to cases after a proper scrutiny and when the facts and brief of the case have been appropriately examined. The Court has specified that the parties should not opt for doctrine of frustration in cases where there is even a slight chance of survival. A party will be allowed to take this clause as a defense only if it does satisfy all the given criterions of doctrine of frustration mentioned above.
Moreover, the Covid-19 pandemic is seen to be temporary. Thus, it is difficult for various companies to seek the claim of doctrine of frustration.
Sanchali Bhowmik is a second year Law Student (L.L.B. Hons.) at Jindal Global Law School.