Force Majeure Clause and COVID-19: Analysis of Impact on different sectors
Written by Gracy Bindra [i] and Udayani Jadhavrao [ii] under the guidance of Mr. Sanjay Kumar [Partner & Head - Pharma & Life Sciences Practice at King Stubb & Kasiva, Advocates & Attorneys]
[i] Final Year student BA LLB. [ii] Second Year, LLB student Symbiosis Law School, Pune
Disclaimer: Please note that the views expressed below represent the opinions of the article's author. The following does not necessarily represent the views of Law & Order.
Background of Force Majeure Conditions due to Pandemic
The recent outbreak of COVID-19 has a devastating impact on mankind and countries globally, its outreach has also affected the trade, business and commerce of the nations. On 11th March 2020, the World Health Organization characterized COVID-19 as a pandemic.
Amidst the growing concerns, India declared a complete lockdown of the country which led to disruption and closure of industries, offices and businesses. This impacted the performance of contracts and obligations entered by the parties and left them to seek to the concept of Force Majeure in the commercial contracts.
Lockdown vs. Curfew
Curfew has been explained by Former Justice K Chandru of the Madras High Court as a partial restriction imposed under Section 144, CrPC by the administration forbidding assemble of five or more people in an area forcing them to stay indoors for a specific period of time.
Lockdown has been defined under Section 2 of the Epidemic Diseases Act, 1897 which means to put restrictions on movements and services except the essential services and commodities.
The striking difference being that the curfew is a partial restriction while lockdown is a complete and more stringent affecting the contractual obligations which would lead to a force majeure event.
Impact of Force Majeure on Contracts
Force Majeure clauses are typically included in contracts that contemplate continuous performance. Such clauses usually contain the effect on the continuation of the contract and obligations of the parties in case of the occurrence of a force majeure event. However, there is no mandatory requirement to include a force majeure clause in a contract.
I. Legal contracts with Force Majeure Clause
While the provisions contained in the Contract Act, 1872 neither define the term ‘force majeure’ nor do they typically state the specific circumstances and events which would qualify as ‘force majeure events’.
As held previously by the Indian courts that, where the contract entered into between the parties contains an express or implied force majeure clause, defining the type of events, such as war, terrorism, earthquakes, hurricanes, acts of government, plagues or epidemics etc., the dissolution of the contract would take place under the terms of the contract itself and such cases would be dealt with under Section 32 of the Contract Act, 1872.
The various reasons supporting the invocation of Force Majeure clause due to the outbreak of COVID-19 are briefly discussed below:
1. The Department of Expenditure clarified on vide Office Memorandum that COVID-19 is a natural calamity and thus, is covered in the Force Majeure clause provided in the Manual for Procurement of Goods, 2017 and further clarified that parties to the contract may terminate their contractual obligations / liabilities by following the due procedure to invoke the Force Majeure clause.
2. The Ministry of New & Renewable Energy has also issued an Office Memorandum dated March 20, 2020 to treat delay on account of disruption of the supply chains due to spread of COVID-19.
3. A typical Force Majeure clause in a contract includes ‘Governmental orders’, ‘change in law’ and / or ‘act of Government’ as one of the events to invoke the clause. The Government of India ordered a state of lockdown vide Order dated 24th March 2020 read with the Guidelines and its addendums. All commercial and private establishments were ordered to be closed barring a few essential services.
II. Legal contracts without Force Majeure Clause
There may be contracts without a such a clause. Hence, the affected party will be at liberty to claim relief under the “doctrine of frustration” under section 56 (2) of the Indian Contract Act, 1872. This will give effect to termination of the contract if it occurs de hors the express or implied clause in a contract as opined in a landmark case.
The Indian Courts have time and again observed that, in case of subsequent impossibility which was not contemplated by the parties during execution of the contract or if the performance of the contract becomes impracticable with regard to the object that the parties had in view, Section 56 would apply.
Impact of Force Majeure on Real Estate Sector
One of the worst affected sectors due to this pandemic is the Real Estate sector especially with regard to leave and license agreement. Parties may seek relief under Sec. 32 and 56 of the ICA in the absence of the force majeure clause in their contract.
Under Section 32 of the ICA, a leave and license /lease agreement, parties are required to pay regardless of temporary suspension of business or loss of revenues. In the absence of the clause under the lease agreement, it is unlikely that a lessee can claim frustration of contract under Section 56 and seek waiver of lease rental as consequence of a Force Majeure event.
However, the Delhi High court ordered that in the absence of a contract or a contractual stipulation, the tenant may generally seek suspension of rent by invoking the equitable jurisdiction of the Court due to temporary non-use of the premises. However, the same would depend on the facts and circumstances of each case.
The Maharashtra Department of Housing vide order dated 17th April, 2020 directed the landlords and homeowners to permit deferral of rent for a period of 3 months to their tenants for residential premises only, these directions do not apply to commercial premises.
Impact on Employee Wages during Lockdown
The terms of employment of workmen are governed by the provisions of Industrial Disputes Act, 1947. Pursuant to the Union Government’s order dated 29th March, 2020, the state governments have mandated all employers to regularly pay their employees amid lockdown. After various petitions challenging the said order, the Supreme Court has directed that private establishments, industries and employers, who are willing, may negotiate terms and enter into settlements with their workers and employees regarding payment of wages for the period with effect from the order till 18thMay,2020 or for any other period as applicable in any particular state during which their industrial establishment(s) was closed down due to lockdown.
COVID-19 through the Judicial Lens
As highlighted above, the spread of the COVID-19 pandemic the Indian courts witnessed various contractual disputes and gave appropriate orders and judgments. Some of them are as follows :
1. Standard Retail Pvt. Ltd vs GS Global Corp And Ors.: In the present case Bombay High Court refused to grant interim measures to the Petitioner observing that the commodity in question was an essential item and lockdown is only for a limited period. Consequently, Petitioner cannot take retract from its contractual obligation of making payments to the Respondents.
2. SEAMEC Ltd. v. Oil India Ltd.: The Apex Court propounded in the present case the implications of a force majeure clause in comparison to protection given under Section 56 of the Act, 1872, There is major difference between the two was reiterated as stated in a Supreme Court case where numerous distinctive principles were given and held that section 32 comes into picture when there is no intervention of the parties and contract stand dissolved whereas Section 56 applies due to violent external force.
As COVID-19 affected the whole world and affected contractual obligations across borders. It is important to understand how other countries regulated the same. Following are few countries on their existing laws and regulations and in case they did not have, how they tackled the same.
The COVID-19 situation has severely affected the contractual obligations in real estate sector, employment agreements and other supply contracts where subsequently, question of force majeure arose. The Indian Government and judiciary have attempted to mitigate the risks of delay in fulfilment of contractual obligations through several official memorandums, judgments and orders. The pandemic is still devastating India with its second wave, creating a state of chaos, further interpretations of the said clause or the absence thereof, would give a clearer picture.
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