COVID-19: Through the Looking Glass by Anuradha R. Chowdhary

The end of 2019 marked the beginning of COVID-19. First reported on the last day of the calendar year 2019, COVID-19 propelled the world into a bizarre version of reality and the world post-COVID-19 may never be the same again. There is no doubt that the pandemic constitutes an extraordinary event (and a national emergency in several countries) in the literal sense.  However, to ascertain whether the spread of COVID-19 can be brought under the legal defense of an extraordinary event, i.e. an event of Force Majeure (FM), an interpretation of what constitutes FM is paramount. 

A FM event constitutes an extraordinary event that is beyond the control of the contracting parties, and may typically include, among other things, an epidemicand acts of God. It may even be extended to include omissions or acts of public authorities and the government that prevent or delay the performance of an obligation which are beyond the control of the parties, or any other reasons which cannot be reasonably forecast or provided against, and which cannot be predicted.In this present situation, the order of the Government of India (GOI) to lockdown the entire nation would qualify as a FM event, where the performance of obligations of contracting parties is hindered. An act of government could also include travel restrictions, quarantines, trade embargoes, or closure of buildings or borders.

·      FM in Contracts:Given the unpredictable nature of the COVID-19 outbreak, and the measures taken by governments across the world, it is possible that the pandemic would constitute a FM event under several types of legal contracts. 

A FM clause is included in most contracts to identify situations in which the performance of the contract becomes impossible by changed circumstances. Parties to a contract can mutually decide the list of events to be included under the FM clause.A FM clause may allow parties to either temporarily suspend their contractual obligationuntil the FM event is resolved, or to terminate the contract if the FM event is not resolved within a specified agreed timeframe. The party claiming FM is under duty to show that it has taken all reasonable efforts to avoid or mitigate the FM event and its effects. This is typically interpreted on a case-to-case basis. 

·     Supply Chain:The Ministry of Finance (MOF) has clarified that the disruption in supply chains due to the spread of COVID-19 is an event of FM and should be treated as a natural calamity. The MOF has further explainedthat a FM clause “does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM situation”[1]. It is imperative that the contracting party consider giving a notice of FM as soon as it occurs “as the same cannot be claimed ex-post facto”. 

Further, with regard to renewable energy projects, the Ministry of New and Renewable Energy (MNRE) has permitted renewable energy implenting agencies to grant time extensions for projects that have been affected by the pandemic. However, developers claiming a disruption of supply chains due to the spread of COVID-19, will be required to produce evidence or documents where supply chains have been disrupted due to the spread of the pandemic in China and other countries during the said time period. The MNRE has requested State Energy Departments (including agencies under Power/Energy Departments of States that are dealing in renewable energy) to treat delays caused due to the disruption of supply chains as FM[2].

·     Statutory Recourse: The doctrine of frustration of contract exists under common law and is embodied under Section 56 of the Indian Contract Act, 1872 (Section 56). In the absence of a FM clause in the contract, a person may rely upon the statutory recourse under Section 56, which allows for discharge of obligations on grounds of impossibility. It seeks to have the contract declared void under its provisions. The conditions to invoke Section 56 include: (i) establishing the existence of a valid contract between parties, (ii) the pending performance of the contract and (iii) the fact that the contract has become impossible to perform due to the happening of an event or a change in law.

·     When COVID-19 Does Not Amount to FM: The very basis of a FM event includes circumstances that are beyond the control of contracting parties or are unforeseeable and prevent such parties from performing their contractual obligations. In circumstances where COVID-19 does not disrupt the performance of obligations, the parties may not avoid their obligations on the pretext that the same are hindered due to FM. For instance, where a contract between a milk manufacturer and a distributor does contain a FM clause, the milk manufacturer may not be excused from its obligation to supply milk by claiming FM since milk would qualify as an essential commodity and its manufacture and distribution is not restricted by the spread of COVID-19. 

With respect to lease agreements that do not contain a FM clause, Section 56 may not be relied upon for cases where there is a completed transfer. InRaja Dhruv Dev Chand vs Harmohinder Singh & Anr[3], the Supreme Court of India has clarified that, “Where the property leased is not destroyed or substantially and permanently unfit, the lessee cannot avoid the lease because he does not or is unable to use the land for purposes for which it is let to him”. Therefore, the property being rendered permanently unfit appears to be a precondition for avoidance of the lease. 

·     Other: The Ministry of Railways classified the period between 20 March and 14 April 2020 as FM, and relaxed charges including demurrage, wharfage, stacking, stabling, detention and ground charges during such FM period[4]. This FM period has now been extended until May 3 in light of the extension of the lockdown. Further, the Ministry of Shipping has also classified COVID-19 as a natural calamity andhas directed major ports to not levy any penalties, demurrage, charges, fee or rentals on any port users for the period between 22 March and 14 April for delays caused to due to the lockdown. 

·     Contracts Containing FM: In order to ascertain whether shelter from unmanageable obligations can be sought during COVID-19, one must first ascertain whether one’s existing contract contains a FM clause. Pursuant to establishing the existence of the same, one must consider whether the contractual obligations are actually prevented by the spread of COVID-19 directly. In the event that obligations are in fact rendered impossible to perform due to the aforesaid, it is important to follow the due procedure mentioned in the FM clause.

Conclusion:

Therefore, while a FM clause in a contract could potentially excuse either or both parties from their contractual obligations, its absence will require the parties to seek recourse under the statutory provisions of law, where permitted. However, FM may not always be a legitimate defense for COVID-19, and it would be instrumental to review the contract/situation carefully to establish such a defense. 

? 2020, UNIVERSAL LEGAL. All rights reserved.

Disclaimer:

The views expressed in this publication are solely the views of the author and not Universal Legal. This publication is intended for informational purposes only and does not constitute legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

[1]No.F.18/4/2020-PPD– issued by the Ministry of Finance (available at: https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf)

[2]No. 283/18/2020-GRID SOLAR – issued by the Ministry of New and Renewable Energy (Available at: https://mnre.gov.in/img/documents/uploads/file_f-1584701308078.pdf)

[3]1968 AIR 1024, 1968 SCR (3) 339

[4] Indian Railways has decided that the period from 22.03.2020 to 14.04.2020 shall be treated under “Force Majeure”. (2020). Retrieved 8 April 2020, from https://pib.gov.in/newsite/PrintRelease.aspx?relid=200738