The Path of Force Majeure during COVID-19
Milind Agarwal and Anjuri Tyagi[i]
Force majeure refers to a clause that is included in contracts to extinguish liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling obligations. The concept originates from the French Civil code and means "superior force.” It relieves parties from their obligations when circumstances arise which could not have been reasonably anticipated at the time of entering the contract. The scope of this term, however, does not extend to delays caused by usual incidents which can cause interruption such as bad weather, funeral etc., as these instances could have been reasonably foreseen by the parties.
Force Majeure in India
In the landmark judgement of Energy Watchdog v Central Electricity Regulatory (hereinafter “Energy Watchdog”), the Supreme Court laid down the scope of force majeure and how to interpret a force majeure clause. The Power Purchase Agreement, in the aforementioned case, provided for a non-exhaustive list of force majeure events, which included “hindrance”, it was held that mere rise in prices is not a hindrance as alternative modes of performance were available at a higher price and it was possible to perform the contract. Therefore, the fundamental basis on which the contract was formed was not destroyed. The Court said that a force majeure clause is supposed to be construed narrowly and if there is an alternative mode of performance, the force majeure clause will not apply. It was held that Courts cannot absolve performance of a contract merely because performance has become onerous due to an unforeseen turn of events.
Covid-19 as a Force Majeure event
The Covid-19 pandemic has brought a lot of hardships to people all over the world and has affected commercial relationships between parties, especially their contractual arrangements. Parties are looking to extend or terminate their contract due to such outbreak. In these recent months, the Courts in India have seen the following two aspects of force majeure.
1. The question of previous non-performance.
In this category, the Courts have dealt with the question of whether a party already in breach of its obligation pandemic could raise the defense of the lockdown as force majeure. In the case of Halliburton Offshore Services v Vedanta, the Delhi High Court while relying on Energy Watchdog, held that the contractor had been in breach since September 2019. The work had to be completed by 31st March 2020 after extending the deadlines and still, there was no substantial progress made until February. Therefore, completion of the work by 31st March 2020 was impossible. The Court held that the past non-performance of the contractor cannot be condoned owing to the nationwide lockdown. The outbreak cannot be used as an excuse for non-performance in these circumstances for prior breach and repeated laxity in performance.
Similarly, in the case of Indrajit Power Limited v Union of India, the Petitioner filed a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter “Arbitration Act”) to restrain the Respondent from appropriating the bank guarantee. The Petitioner claimed that the power plant run by them was non-operational due to the lockdown. It was submitted that the invocation of bank guarantee was unfair, inequitable and unreasoned as it did not consider the submissions made by the Petitioner in reply to the show cause notices. The Court held that the Petitioner was in breach since April 2018 and despite the extension of 12 months, its position remained the same. The lockdown came into force on 24th March 2020 and the Petitioner was in default prior to such lockdown. Merely because the invocation of bank guarantee would cause financial distress, it cannot qualify as a ground for stay.
2. The question of government notifications and circulars.
In this category, the Courts have investigated whether various circulars and notifications passed by the Regulatory Authorities during this pandemic could absolve parties of its non-performance. These circulars have played a key role in identifying industries for which Covid-19 qualifies as a force majeure event. In the case of Standard Retail Pvt. Ltd. v. M/s. G. S. Global Corp & Others (hereinafter “Standard Retail Case”), a petition under Section 9 of the Arbitration Act, was filed in order to restrain the Respondent from “encashing the letters of credit” from the bank. The agreement was for the supply of certain steel goods by the Respondent from South Korea. The Petitioner relied on certain notifications to suggest that the pandemic is a force majeure event. Regarding the notification, the Court held that the Notifications/Advisories relied upon by the learned Senior Counsel for the Respondent did suggest that the distribution of steel was declared as an essential service. The Court also stated that all port activities or movement of good was not in any way hindered by the pandemic. Therefore, the pandemic did not qualify as a force majeure event for supply of steel.
Similarly, in the case of MEP Infrastructure Developers Ltd. v. South Delhi Municipal Corporation (SDMC) and Others, a writ petition was filed in the Delhi High Court for modification of an order regarding collection of tolls, which was only possible on giving certain payment to the Respondent owing to a circular passed by the Ministry of Road and Highway Transport. The Petitioner contended that due to COVID-19, a force majeure event has occurred, and it cannot pay the Respondent. The Court recognized that both the Petitioner and the Respondent Corporation relied on the same circular issued by the Ministry of Road and Highway Transport, which notified the COVID-19 pandemic to be a force majeure event. The Court held that “in effect, the force majeure clause under the agreement immediately becomes applicable and the notice for the same would not be necessary. That being the position, a strict timeline under the agreement would be put in abeyance as the ground realities had substantially altered and performance of the contract would not be feasible till restoration of the pre force majeure conditions.” The Court has stated that there is no need for a notice to avail the force majeure provision in the contract and the circular was enough notification. The Court also noted that even though certain relaxations had been made, the same would not by itself amount to an abatement of the force majeure event in the context of road construction projects. This decision was been taken in light of the various subsisting issues that national and inter-state lockdown will continue to have an effect on the performance of such road construction contracts.
In the case of Cyquator Media Services Pvt. Ltd. and Others v. IDBI Trusteeship Services Ltd. and Others, the Court was presented with a different set of facts. The Appellant filed an appeal under Section 37 of the Arbitration Act, seeking to restrain the Respondent (IDBI) from acting on the Pledge Invocation Notices and also on the Corporate Guarantee Notice. The Appellants stated that due to the unprecedent times of the Covid-19, “the stock markets are not only operating at historically lower points, but they are extremely volatile”, and hence, their appeal to seek restraint should be allowed based on force majeure. The Court, however, agreed with the Single Judge that a clause akin to force majeure cannot be read into the various contracts entered into by parties as “the Regulatory Authorities viz. RBI and SEBI had not issued circulars to restrict the right of pledgees of shares.” Hence, it can be seen that the declaration of Covid-19 as a force majeure event by the Regulatory bodies is also playing a decisive role in the outcome of the cases.
That being said, these circulars have proved to be insufficient to avail the benefit of a force majeure clause in some situations. In the M/s. Polytech Trade Foundation v. Union of India & Others case, a petition under Section 151 of the Code of Civil Procedure, 1908 was filed in the Delhi High Court by the Petitioners asking for an injunction on charging demurrage and container detention charges on account of the lockdown post 22nd March, 2020 due to which they could not unload the ship. The petitioner relied on the circulars issued by the Ministry of Finance and Shipping, which stated that Covid-19 pandemic qualifies as a force majeure event. The Court, while considering the various letters and circulars issued by the government, held that they cannot interfere with a private contract that Respondents had with the Petitioner. The Court stated that the circulars were just advisory in nature and were in no way binding on private parties. A similar situation also arose in case of Golden Importers and Others v. Union of India and Others, wherein the Petitioner relied on the same circulars passed by the Ministry of Finance and Shipping. The Kerala High Court relying on precedent in the Polytech Case held that demurrage was part of contractual obligations between two private parties and could not be disallowed by the government circulars. The difference in these cases from the MEP infrastructure case was that one of the parties in the MEP infrastructure case was SDMC which was a government entity. This made the circular by the government to be of a binding nature on the government authority.
The above stated judgments help us understand the impact the Covid-19 pandemic on different kind of contracts in India. It would be prudent to state that in consonance with the position laid down with regards to the applicability of a force majeure clause, the Court is looking at the link between the pandemic and its effects on the contractual obligations of the parties with restraint. It is only in those situations where the pandemic and the subsequent lockdown has a direct effect on the non-performance of a contract, the parties have been relieved of their contractual obligations. Analysing the first part of the paper, parties are trying to invoke force majeure clause in situations where they have been in breach since much before the nationwide locked commenced. The Courts, in such situations have held that if a party has been in default before lockdown, they cannot avail the defence of Force Majeure because it would not be fair to the other party.
The second part of the paper portrays the way that the force majeure provision is being invoked through the circulars by the regulatory authorities. The Courts have adopted a case by case approach wherein cases of the same industry too might have different outcomes to qualification of a force majeure event. However, it is important for the Court to investigate other factors caused due to the pandemic which can have a strong bearing on the contract. An example of which could be seen in the Standard Retail Case, wherein even though the supply was of an ‘essential service’, the Court also considered if labour was available for work due to the labour migration, which could in case of non-availability could altogether have led to a different outcome.
[i] The authors are 5th-year law students at Jindal Global Law School, who are currently interning at Nishith Desai Asscoiates and as a Research intern respectively. Our interests are Company law, Competition law and Tax. For any discussion related to this article, you can contact us at firstname.lastname@example.org.