IMPACT OF COVID-19 ON COMMERCIAL CONTRACTS BY - HRIDEJA SHAH

IMPACT OF COVID-19 ON COMMERCIAL CONTRACTS

AUTHORED BY - HRIDEJA SHAH

World Health Organization declared COVID-19 as a pandemic. Worldwide, every business was required to direct a way to combat the challenges brought by the spread of Coronavirus (COVID-19) including fulfilling their contractual obligations. However, with the continued outbreak at that time, businesses were finding it difficult to fulfil their contractual duties and were considering whether reliance could be placed on force majeure clauses or doctrine of frustration clauses to alleviate the impact on their business.

This paper reflects upon the impact of COVID-19 on commercial contracts. The first phase of the paper will discuss the force majeure clause and whether the same can be invoked due to the pandemic. The second phase of the paper discusses the alternatives to force majeure clause such as doctrine of frustration. The third phase of the paper looks at how laws of few other countries deal with force majeure.

1. FORCE MAJEURE CLAUSE & ITS IMPLEMENTATION

Force Majeure is a term that is derived from French literature and means a “superior force.” As per Merriam Webster dictionary, force majeure is defined as, “an event of effect that cannot be reasonably anticipated or controlled.”[1]

In India, Force Majeure is a contractual provision that allows either of the parties or protects the parties from their contractual obligation. Force Majeure clauses intend to give relief to the performing party from consequences of an event that the party would have no control over. It can be considered as an exception to breach of contract.[2]

Section 32 of Indian Contracts Act states that, “Contingent contracts to do or not to do anything if an uncertain future event happens cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void.”[3]

Indian courts have usually construed the force majeure clauses narrowly. However, the first question raised is whether a pandemic would fall under the ambit of Force Majeure clauses. Given the supply chain disruption that has been caused by COVID-19 allows the suppliers to request delay in performance or even avoid it. Further, companies that depend on these suppliers may not be able to perform their contractual duties towards their customers. In this context, it is important to note whether COVID-19 falls under the ambit of force Majeure.

Usually, most contracts enumerate a list of events that could fall under Force Majeure such as but not limited to, “Act of God including earthquakes, fires, floods, hurricanes; Terrorism & war, change in laws, Strikes or labor disputes and in some cases the clause also includes pandemics and epidemics.[4]

As stated, whether a contractual duty can be avoided on force majeure grounds is an actual determination based on facts that depends on the specific terms of the contract.[5]  While most contracts tend to list examples as stated above that are invoked upon the happening of that event, several contracts often rely upon generic language in their force majeure clauses.[6] However, under Indian law, the force majeure clause must be expressly stated and cannot be implied. The expressly stated clause would define the protection afforded by the party.[7]

There are two possible scenarios that could conclude as to how a force majeure includes a pandemic a) the force majeure clause itself includes and expressly states a pandemic. Such an inclusion would trigger the clause as WHO declared COVID-19 outbreak as a pandemic. b) the clause includes language that can construe the pandemic as an extra ordinary event or circumstance that is beyond any control of the either of the parties. Since the interpretation in such cases is made on the basis of language, such language that includes pandemic could trigger the clause. However, on February 19, 2020, with the raising distresses in the industry, the Department of Expenditure, Ministry of Finance, Government of India in an office memorandum stated that the disruptions caused by the outbreak should be considered as a natural calamity and force majeure provisions can be invoked when it’s appropriate.[8] With this, it can be stated that natural calamity falls under the ambit of Act of God which there by is included in most contracts. Even though the memorandum states that it can be invoked when appropriate, with the outbreak at hand, invocation of this clause would be first remedy by any party under contractual obligation under commercial contracts unless such clause does not exist in his contract.

Similarly, the Ministry of New & Renewable energy as well declared invocation of force majeure clauses with respect to solar project developers in order to avoid financial penalties.[9] Yet in the most recent decision, in case of Standard Retail Pvt. Limited & Ors. v. G.S. Global Corp & Ors[10]  by Bombay High Court under Section 9 of the Arbitration & Conciliation Act, the court firmly established that force majeure was not a clause that calls for ‘one size fits all’. The petition was filed by Indian buyers under a contractual obligation to purchase steel products from South Korea suppliers. Since the goods had been shipped & supplier had performed his duty under the contracts, the petition was denied. The court stated that the use of the clause of force majeure was strictly for the benefit of supplier & not the buyer. Buyer’s own financial needs or difficulties cannot be considered as it falls under economic distress.[11] Even though the memorandum by new & renewable energy ministry is solely for solar project developers, it raises a substantial question as to whether economic distress should be considered in force majeure clauses during this pandemic.

Once force majeure is invoked, the party must comply with providing proper notice before claiming such relief. In most cases, force majeure provisions also require that the party shows that he had taken all reasonable methods to prevent or mitigate the effects of the event.[12] The party may also be required to continue performing if the contract can be performed up to a certain extent that was not prevented by the event. Though the standard is subjective & varies from case to case, if the force majeure period prolongs, then the contract may be terminated.[13]

1. WHEN FORCE MAJUERE CANNOT BE INVOKED- ALTERNATIVE REMEDIES

In instances where the contract does not include a force majeure clause, the party can claim relief under the doctrine of frustration. Doctrine of frustration is found under Section 56 of the Indian Contract Act.

Section 56 of the Indian Contract Act, 1872 reads as follows:

“Agreement to do impossible act —An agreement to do an act impossible in itself is void. Contract to do 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.”[14]

In order to claim relief under this section, it must be established that the performance has become impossible by an event that could not be prevented and such event was not self-induced or did not occur due to his negligence. In the case of Energy Watchdog Vs. Central Electricity Regulatory Commission & Ors[15], the Supreme Court of India considered Section 56 in the context of long-term contracts and stated that,

“What was held was that the word “impossible” has not been used in the Section in the sense of physical or literal impossibility. The performance of an act may not be literally impossible, but it may be impracticable and useless from the point of view of the object and purpose of the parties. If an untoward event or change of circumstance totally upsets the very foundation upon which the parties entered their agreement, it can be said that the promisor finds it impossible to do the act which he had promised to do. It was further held that where the Court finds that the contract itself either impliedly or expressly contains a term, according to which performance would stand discharged under certain circumstances, 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 Act. If, however, frustration is to take place de hors the contract, it will be governed by Section 56.”

Based on this, the contract can still be performed substantially if the object & purpose of the contract is not useless. The event as stated needs to “totally upset the foundation upon which the parties entered agreement”. The obligation will not be declared frustrated unless the purpose of the contract becomes useless. To simply state, certain grounds would not qualify for frustration of contract such as commercial hardship, any intervention that does not defeat the purpose of the contract or in India, the lockdown & the direct consequences thereof.[16] For example, if the party cannot make a payment due to lockdown, there are still other channels of payment options open such as Paytm, Google Pay or online banking that would allow the party to fulfil his contractual duties.

However, before invoking the doctrine of frustration, the party would have to show that the event i.e., COVID-19, has made the performance of contract impossible. Mere economic distress cannot be sufficient basis to trigger section 56.[17] The burden of proof under doctrine of frustration seems to be higher & puts the nonperforming party at risk, when the party either does not have a force majeure clause in the contract or is unable to invoke the clause.

1. LAW UNDER OTHER JURISDICTIONS

Since India is under contractual obligations with several countries, it is important to know whether the laws of other jurisdictions would include COVID-19 outbreak under force majeure.

While in India, the concept of force majeure is implemented through contractual provisions, in other jurisdictions such as USA, courts tend to look at varied elements such as, “whether the force majeure event was foreseeable, whether performance has been rendered impossible & directly related to the force majeure event.” In the case of Specialty Foods of Indiana, Inc. v. City of S. Bend (2013)[18], Indiana courts tackled force majeure clause in relation to food & beverage services at college football hall of fame. After the contract was signed, the location of hall of fame was unexpectedly relocated. The force majeure clause of the contract excused performance in the event of, “by reason of strikes, lockouts, inability to procure labour or materials, failure of power, fire or other casualty, acts of God, restrictive governmental laws or regulations, riots, insurrection, war or any other reason not within the reasonable control of” the party required to perform” With this language at hand, the courts construed that “any other reason not within the reasonable control of parties” given in the clause, left the clause to be broadly interpreted and hence included the unforeseen relocation of Hall of Fame even though relocation was not specifically included in the clause.[19] Thereby, any contract that has the language such as, “any other reason not within the reasonable control of parties” could invoke the force majeure clause using this court’s ruling in the current outbreak. Since US has different federal laws & state laws, this precedent would only be a persuasive authority in other states or federal courts.

In UK, in the case of Channel Island Ferries Ltd v. Sealink UK Ltd, [1988][20], wherein the Court of Appeals stated that since the clause included the words, “any event beyond the control of relevant party” force majeure could be relied upon once the affected party had taken all steps to prevent or mitigate the impact of the event.[21] If the courts continue the use of this precedent then COVID-19 could fall under force majeure clause as an event that was beyond control of either party.

Under Kuwaiti Civil Code, force majeure is found under Article 214 and 215. For an event to be classified as force majeure under these laws, the event would have to make the party’s contractual obligations impossible.[22] If the event merely causes burden and exposes the part to exorbitant loss then such event would qualify as hardship.[23] Kuwaiti law governs force majeure differently as under such law for example, if you lease equipment for business and your business can no longer function, then in such case the party cannot invoke force majeure as he would still be able to lease the equipment & the reason for the lease would be irrelevant.[24]

Under the Dutch Civil Code (DCC) , force majeure can be found in Article 6:75. A successful invocation of force majeure has the following consequences: a) the party is not obligated to perform (performance impossible) b) the other party cannot claim any damages c) if the performance is impossible permanently then the other party lacks power to suspend performance d) the party may adopt to measures such as rescission or modification of contract if such unforeseeable circumstances exist.[25] The duty to mitigate that exists under Indian law can be seen in DCC as duty to renegotiate & is governed by the principles of reasonableness and fairness.[26] Based on this, not every impediment may constitute invocation of force majeure clause.

Article 7.1.7 under the  UNIDROIT Principles of International Commercial Contracts defines force majeure as “party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences”[27] To simply put, where in some cases, performance may merely be delayed, this article will give extra time for performance and in some cases prevent the performance completely.

Considering the recent pandemic, even International Chamber of Commerce (ICC) has implemented measures and updated Force Majeure & hardship clauses that help business & small draft contracts to adapt to the unforeseen event.[28]

1. CONCLUSION

When the lockdown happened in India, several businesses had suffered quantifiable losses, however, it was be difficult to ascertain how many were adequately prepared to take over the dispute by invoking the force majeure clause. Since every clause is determined case by case depending on the language, any business or party would require having ample amount of evidence that force majeure clause applied, or the doctrine of frustration allowed them to avoid their contractual duties. Any party should have ample evidence to show that there were no other alternative means to fulfil their obligations. While every country has its own laws and the way force majeure is invoked, within the sphere of international commercial contracts, the parties would be governed by UNIDROT principles or any other law that was agreed upon. Any general opinion on the overall impact on commercial contracts cannot be given as most cases are determined individually based on the specific clause.

[1] Merriam-Webster, s.v. "Force Majeure," accessed April 6, 2023, https://www.merriam-webster.com/dictionary/force%20majeure

[2] Cyril Amarchand Mangaldas, "Covid-19, Coronavirus, Force Majeure And Impact On Commercial Contracts," BloombergQuint (March 23, 2023), https://www.bloombergquint.com/coronavirus-outbreak/covid-19-coronavirus-force-majeure-and-impact-on-commercial-contracts

[3] Indian Contract Act, § 32, 9 of 1872 (India)

[4] Lawrence Rochefort et al., "The Coronavirus and Force Majeure Clauses in Contracts," Akerman LLP (last visited Apr 5, 2023), https://www.akerman.com/en/perspectives/the-coronavirus-and-force-majeure-clauses-in-contracts.html

[5]Utkarsha Nikam, "CONTRACTS IN THE TIME OF COVID-19: FORCE MAJEURE AND FRUSTRATION," Lex Forti Legal Journal, Vol. 1, Issue IV, ISSN: 2582-2942 (last visited Apr. 6, 2023), https://secureservercdn.net/160.153.137.170/5kg.b01.myftpupload.com/wp-content/uploads/2020/04/Utkarsha-Nikam-Manuscript-Utkarsha-Nikam-2.pdf?time=1586509916

[6] Bharat Vasani et al., "COVID-19: OFFICIALLY A PANDEMIC," Cyril Amarchand Mangaldas Blog (last visited Apr. 6, 2023), https://corporate.cyrilamarchandblogs.com/2020/03/covid-19-officially-a-pandemic-faqs-coronavirus/.

[7] Supra note 2

[8]Rajdeep Choudhury, Coronavirus: The Fallacy of Forcing Force Majeure, (dated March 17, 2020)  https://www.barandbench.com/columns/coronavirus-the-fallacy-of-forcing-force-majeure

[9]Madhu Sweta, et. al, "Impact of COVID-19 on Indian Commercial Contracts," Singhania & Co. (dated Mar. 27, 2020), https://singhania.in/safeguards-in-force-majeure-in-india/

[10] Standard Retail Pvt. Limited & Ors. v. G.S. Global Corp & Ors, Commercial Arbitration Petition (L) No. 404 of 2020 (Bombay High Court Apr. 8, 2020)

[11] Amicus Services, "Force Majeure- No one size fits all," LinkedIn, https://www.linkedin.com/posts/amicus-services-b4b6b9152_amicus-alert-force-majeure-no-one-size-activity-6655354403421294592-ba--

[12]Khaitan & Co., "COVID-19: Key Considerations for the Indian infrastructure sector," Khaitan & Co. (March 25, 2020) https://www.khaitanco.com/covid-19/COVID-19-Key-Consideration-for-the-Indian-infrastructure-sector

[13] Supra note 9 

[14] Indian Contracts Act § 56

[15] Energy Watchdog v. Central Electricity Regulatory Commission & Ors, (2017) 4 SCC 629

[16] Pratik Bhat et al., COVID-19 – An Event Frustrating Contractual Performance, Solomon & Co (dated Mar. 27, 2020), https://www.linkedin.com/posts/solomon-co-advocates-solicitors_covid-19-an-event-frustrating-contractual-activity-6652914208776253440-vf4H

[17] Vijayendra Pratap Singh, et. al, COVID-19 Performance of Agreements in India, AZB & Partners, (dated March 13, 2020) https://www.azbpartners.com/bank/covid-19-performance-of-agreements-in-india/

[18] Specialty Foods of Indiana, Inc. v. City of S. Bend, 997 N.E.2d 23, 27-28 (Ind. Ct. App. 2013)

[19]Holley, C. C. (2020, March 31). A Closer Look At The Coronavirus Pandemic As A Force Majeure Event. American Bar Association. Retrieved from https://www.americanbar.org/groups/tort_trial_insurance_practice/publications/committee-newsletters/closer_look_coronavirus_pandemic/

[20] Channel Island Ferries Ltd v. Sealink UK Ltd, [1988] 1 Lloyd's Rep 323 (Eng. C.A.).

[21]Sourav Mukherjee, "Lockdown due to Covid-19 and its impact on Commercial Contracts," LinkedIn (April 13, 2020), https://www.linkedin.com/pulse/lockdown-due-covid-19-its-impact-commercial-contracts-mukherjee/ (accessed April 6, 2023)

[22] Al-Hamad Legal Group, Impact of Coronavirus (COVID-19) on Commercial Contracts, Client briefing note, March 2020, https://www.linkedin.com/posts/ahmadaalshorbagy_impact-of-covid-19-on-commerical-contracts-activity-6647464430873509888-nFCx

[23] Id.

[24] Supra note 22

[25] Impact COVID-19 on contract performance under Dutch law, Hogen Lovells, (March 30, 2020), https://www.engage.hoganlovells.com/knowledgeservices/news/the-impact-of-covid-19-on-contract-performance-under-dutch-law

[26] Id.

[27]Article 7.1.7, UNIDROIT Principles of International Commercial Contracts  https://www.unidroit.org/instruments/commercial-contracts/unidroit-principles-2016

[28] ICC Force Majeure and Hardship Clauses, International Chamber of Commerce, March 2020, https://iccwbo.org/publication/icc-force-majeure-and-hardship-clauses/