Kashish Makkar, Aditya Bhattacharya & Ankur Singhal
How and when the COVID-19 outbreak can suspend contractual obligations under four types of force majeure clauses
This is the 3rd post of our COVID-19 Series.
General Legal Position in India
The decision of the Indian Supreme Court in Satyabrata Ghose v Mugneeram Bangur [AIR 1954 SC 44] sums up the law applicable should a force majeure event occur in contracts governed by Indian Law:
“The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of section 56 of the Indian Contract Act. […] It must be held also that to the extent that the Indian Contract Act deals with a particular subject, it is exhaustive upon the same and it is not permissible to import the principles of English law dehors these statutory provisions. The decisions of the English courts possess only a persuasive value and may be helpful in showing how the courts in England have decided cases under circumstances similar to those which have come before our courts.” [Emphasis Supplied]
Therefore, for contracts governed by Indian law, s 56 is the go-to provision. However, the court in the instant case put a qualifier to this position. It noted that if “the contract itself contain[s] impliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances the dissolution of the contract would take place under the terms of the contract itself and such cases would be outside the purview of section 56 altogether.” (emphasis supplied)
However, the Court did note that the contract can be frustrated outside the scope of the contract itself. These cases, the court held, will be in the sole purview of s 56. As per the Court, if an event or circumstance occurs which the parties did not factor in while making their contract, “the court can pronounce the contract to be frustrated and at an end” – provided, such circumstance “is so fundamental as to be regarded by law as striking at the root of the contract as a whole” as per s 56 of the Indian Contract Act, 1872. [Para 16, AIR 1954 SC 44]
The Court has upheld this position with approval in the recent case of Energy Watchdog v CERC [(2017) 14 SCC 80].
Analysis with respect to COVID-19
Having noted the governing case-law, we can examine how the pandemic can be covered under different types of force majeure clauses:
For the purpose of our discussion, force majeure clauses may be classified into three broad categories: first, clauses which explicitly enlist epidemics/pandemics (A); second, clauses which explicitly exclude epidemics/pandemics (B); and third, clauses which do not mention epidemics/pandemics, but do not exclude them either (C).
The three types of clauses are discussed in turn below.
Clauses which explicitly enlist epidemics/pandemics:
Sample Clause: “Force Majeure events mean/include fire, floods, epidemics and strikes that materially affect the performance of the parties to the contract”
In case the force majeure clause specifically enlists ‘epidemic’/’pandemic’ as a force majeure event, then it will be convenient for the parties to claim COVID-19 as a FM event. The following factors may be considered:
- Declaration of Covid-19 as ‘pandemic’ and ‘natural calamity’ by WHO and Indian Government: The WHO’s categorisation of the outbreak as a “pandemic” may be of significant persuasive value in cases where the force majeure provision contains appropriate language. On 11 March 2020, the World Health Organisation (WHO) classified the outbreak as a “pandemic”, which is considered more severe than an “epidemic” because of its geographical spread. Further, in response to industry concerns, on 19 February 2020, the Department of Expenditure, Ministry of Finance, Government of India issued a cryptic Office Memorandum stating that the outbreak that has caused disruptions in the supply chain should be considered as a “natural calamity” and force majeure provisions may be invoked “wherever considered appropriate”.
- Notice: Generally, such force majeure clauses provide for notice period and service of notice to the non-affected party. Such notice has to be served in order to claim the force majeure event, and the respect remedy, either in the nature of termination, or to request extension of time or delay to honor the terms of the contract.
- Burden of proof: The affected party carries the burden of proving the validity of its claim for force majeure relief. It has to adduce evidence that an event of force majeure occurred, which was beyond its reasonable control and which prevented or delayed its performance of the affected obligations.
2. Clauses which explicitly exclude epidemics/pandemics
[Sample Clause: “Force Majeure events include fire, earthquake, and floods that materially affect the performance of the parties to the contract. Any epidemics or any other calamity will not amount to a Force Majeure event”]
If the force majeure clause is to the effect that, “Force Majeure events are fire, flood, strikes but does not include epidemics…”, the current outbreak is unlikely to help you invoke your force majeure clause. The Supreme Court in Satyabrata Ghose v Mugneeram Bangur clearly held that “if the parties do contemplate the possibility of an intervening circumstance which might affect the performance of the contract, but expressly stipulate that the contract would stand despite such circumstances, there can be no case of frustration because the basis of the contract being to demand performance despite the happening of a particular event, it cannot disappear when that event happens.” Therefore, if the FM clause in your contract excludes Epidemics, you cannot resort to s 56 of the Indian Contract Act to claim supervening impossibility and suspend/dispense with your obligations under the contract.
However, even if epidemics/pandemics are excluded, most force majeure clauses do include a “natural calamity” or “acts of god” as instances of force majeure events. If this is the case, the party may rely on the Office Memorandum No. F. 18/4/2020-PPD, dated February 19, 2020, issued by the Ministry of Finance (Dept. of Expenditure), advising all ministries that the outbreak of COVID-19 is to be considered as a “natural calamity” and that any disruption in supply chains for government contractors are not to be penalised. Although this is merely an advisory note issued by the Ministry, it will have persuasive value in the characterisation of COVID-19 as a “natural calamity”.
Furthermore, even if admittedly the outbreak of COVID-19 may not be covered if pandemics/epidemics are excluded, the same may not be said for the consequences flowing out of the said outbreak. As a result of this pandemic, the Union Governments and various State Governments have taken numerous measures, most of which have a restrictive effect on commerce. These measures, even if completely abstracted from their root cause, i.e., a pandemic, may be seen as force majeure events in and of themselves. There is also the associated question of party intent. It may be argued that while excluding pandemics/epidemics, the parties could not have intended to also exclude all of the measures taken by the Government from the ambit of the FM clause.
3. Clauses which do not mention epidemics/pandemics, but do not exclude them either
This type of clause may be further divided into two sub-categories: exhaustive clauses (a); and inclusive clauses (b).
[Sample Clause: “Force Majeure events means fire, floods and strikes that materially affect the performance of the parties to the contract”]
As noted previously, in Satyabrata Ghose v Mugneeram Bangur, the Court held that if the parties do not contemplate an event in the contract and such an event “is so fundamental as to be regarded by law as striking at the root of the contract as a whole”, s 56 of the Indian Contract Act will apply.
Clearly, if there is an exhaustive Force Majeure clause in the contract, and the same does not prescribe or exclude epidemics as one of the Force Majeure events, it can be argued that the parties did not contemplate that such an event could strike at the root of their contract and discharge them of their obligations. The party claiming COVID-19 to be a force majeure event can present evidence of memorandums exchanged during their negotiations to substantiate their argument. Perhaps, they can argue from the standpoint of their obligations under the contract and how an epidemic could have affected the same was beyond what was foreseeable to the parties.
In such a scenario, the Court can declare the contract to be void under s 56 of the Indian Contract Act.
The central question is whether the parties could have reasonably foreseen the outbreak of this pandemic. If the answer to this is in the negative, then the ratio of Satyabarata Ghose operates to offer the parties protection under s 56 of the Indian Contract Act. While the question of foreseeability is undoubtedly one of fact, the intention of the parties is primarily to be gleaned from the words of the contract. If the parties really intended to exclude such a pandemic from the ambit of the FM clause, then there is no persuasive reason as to why it was not included in the text of the FM clause itself.
(b) Inclusive Clauses not Enlisting Epidemics
[Sample Clause: “Force Majeure events includes fire, floods, strikes and other such natural calamities/acts of God that materially affect the performance of the parties to the contract”]
A force majeure clause typically includes both a list of specified triggering events and a catch-all phrase designed to cover events not specifically listed in the clause. In case, the words ‘epidemics or diseases’ is not mentioned, but the clause contains a catch-all phrase, then the phrase would raise the question of interpretation, because the list of triggering events becomes open-ended. A catch-all phrase could be “such other events beyond the control of parties” or “act of god” etc. Hence, it becomes a matter of interpretation for the Court and the parties, to decide whether Covid-19 would fall within the scope of such catch-all phrases. In any event, the interpretive rule of ejusdem generis – that when a list of specific items belonging to the same class is followed by general words, the general words are to be treated as confined to other items of the same class – will be used to determine contractual intention.
When the FM clause does not explicitly exclude pandemics/epidemics, a party arguing that COVID-19 is covered will have to satisfy the Court that the coverage of a pandemic/epidemic is an implied term in the contract. As held by the Apex Court recently in Nabha Power Ltd. v PSPCL [(2018) 11 SCC 508], an implied term may be read in when the Court is convinced that while entering into the contract, the implication would have been in the mind of both the parties, that it is reasonable, equitable, and objective, and that it gives business efficacy to the contract. All of these tests are satisfied in relation to the outbreak of COVID-19. This is because the intent of parties that may be attributed to the drafting of an inclusive FM clause is to cover events such as these which could not have been possibly foreseen. Furthermore, the inclusion of COVID-19 as a FM event in an inclusive clause is undoubtedly reasonable, equitable, and objective.
The Authors are students at NLSIU Bengaluru.
Image Source – Mercom
Categories: Corporate Law, COVID-19