A. Introduction:
The outbreak of the Novel Coronavirus Disease (COVID-19) into a global pandemic corona virus and the subsequent governmental restrictions on movement of people in India by invoking provisions of the Disaster Management Act, 2005 have led to a severe breakdown of commercial activities in India. People have been restricted from going to office spaces, malls, shopping complexes, theatres, etc. and businesses including commercial and industrial establishment have been restrained from being open and by notification have been forced to remain closed by the government. A vast majority of such offices, shopping complexes, theatres, etc. are operated from either lease-hold and/or leave and license basis and due to lack of footfall as well as governmental restrictions have been facing severe fall in revenue due to which they are unlikely to be able to bear the huge rents which they have to pay for such premises. During such a time, a question that has arisenis whether force majeure be invoked where a supervening government notification orders a shutdown of commercial establishments? Conversely, can force majeure be invoked if a service provider chooses to scale back operations for commercial inconvenience, such as a dramatic and unprecedented reduction in customer footfall? The purpose of this note is to examine how the law interprets occurrence of ‘force majeure’ and whether COVID-19 constitutes force majeure under contracts in India.
B. Force Majeure and its interpretation in Law:
The term ‘force majeure’ is a French term that has been defined as “superior power, circumstances beyond one’s control, inevitable” .A corresponding term under the jurisprudence applicable to commonwealth countries is the term ‘vis major’ .However, the term ‘force majeure’ is of much wider import and an analysis of various rulings on the subject of force majeure, shows that where reference is made to ‘force majeure’, the intention is to save the performing party from the consequences of anything over which he has no control . Nevertheless, since there is no universal definition of the term ‘force majeure’ parties while negotiating the clause have made several variations with the evolution of time and nature commercial transactions.
While ‘force majeure’ is not a concept that is codified in Indian statute (and is, instead, a creature of commercial contract), the closest approximations to force majeure in Indian statute are in Sections 32 and 56 Indian Contracts Act, 1872 (“Act”). Section 56 of the Act is based on the legal maxim ‘Lex non cogitadimpossibilia’, meaning that the law does not compel a man to do which he cannot possibly perform and in the English law from the ‘Doctrine of Frustration’ . However, for invoking provisions of Section 56 of the Act, it is essential to ensure that the events leading to frustration of the contract are not self-induced, or simply onerous or due to acts of negligence and such an event has led to the contract becoming void . Moreover, there is an important distinction between the doctrine of frustration on the one hand under the Act, and force majeure on the other. The doctrine of frustration may mean that a contract is discharged in entirety where, for instance, the fundamental commercial basis/substratum to the contract ceases to exist. Force Majeure on the other hand has evolved in contracts as a temporary event that excuses the promisor from performing its obligations under the contract, without the attendant consequences of breach of liability for paying damages. However, if a force majeure event were to subsist beyond a defined period in contract, either party is entitled to terminate the contract, without consequences for breach applying. A force majeure event thus, may ultimately resultin the contract being terminated for frustration. However, force majeure in itself, does not mean that the contract is frustrated from the inception of its invocation.
Recognizing the distinction between temporary excusing events and the avoidance of contracts in entirety, the Supreme Court in the case of Satyabrata Ghose v. Mugneeram Bangur& Co., had provided the scope of Section 56 of the Act, which is as follows: “Section 56 occurs in Chapter IV of the Indian Contract Act which relates to performance of contracts and it purports to deal with one circumstances under which performance of a contract is excused or dispensed with on the ground of the contract being-void…The first paragraph of the section lays down the law in the same way as in England. It speaks of something which is impossible inherently or by its very nature, and no one can obviously be directed to an act. The second paragraph enunciates the law relating to discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done.”
Further in the case of Sushila Devi v. Hari Singh, it was held “The impossibility contemplated by Section 56 of the Contract Act is not confined to something which is not humanly possible., If the performance, of a contract becomes impracticable or useless having regard to the object and purpose the parties had in view then it must be held that the performance of the contract has become, impossible”
In the case of Energy Watchdog v. CERC, the Supreme Court while dealing with ‘force majeure’ under power purchase agreements held that “’Force majeure’ is governed by the Indian Contract Act, 1872. In so far as it is relatable to an express or implied clause in a contract, such as the PPAs before us, it is governed by Chapter III dealing with the contingent contracts, and more particularly, Section 32 thereof. In so far as a force majeure event occurs de hors the contract, it is dealt with by a rule of positive law under Section 56 of the Contract…When a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 can have no application.”
Thus, on an analysis of the majority of judgments in relation to force majeure and its applicable provisions under the Act, the following principles emerge:
(i) Whilst there are certain conceptual overlaps, there is a difference between contractual Force Majeure on the one hand, and frustration of contracts under Section 56 on the other;
(ii) The starting premise to force majeure analysis in commercial contracts is to see what the contract actually says with respect to force majeure. Force majeure clauses have evolved over time, from rudimentary ‘act of God’ type provisions, to capturing more detailed events and circumstances, such as government orders mandating lockdowns;
(iii) The Supreme Court’s decision in Alopi Prasad provides a cardinal litmus test as to whether the promisor is excused from his obligations: i.e. a contract is not frustrated merely because the circumstances in which it was made are altered. The courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events.
(iv) If a contract does have a force majeure clause, further attendant contractual provisions will need to be considered. What does the contract provide for invocation of force majeure (Does FM just ‘happen’ because of a supervening government declaration, or does it require the obligor to notify the other party expressly of its resultant inability to perform?). For how long does FM need to subsist before either party can terminate the agreement?
(v) Conversely, if a contract does not have a force majeure clause, how is impossibility of performance to be construed? For this, please see section D below.
(vi) Where a contract contains a force majeure clause which on construction by the Court is held attracted to the facts of the case, Section 56 will have no application and hence, cannot be implied into the contract.
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Mr. Pradeep Ratnam is a senior partner with K-Law specialized in general corporate, PE, infrastructure laws, project finance and M&A and can be contacted on pradeep.ratnam@klaw.in. Mr. Vishal Bhat is an LLM in Business Laws from NLSIU and a partner with K-Law specializing in real estate, structured debt, advisory and general corporate matters and can be contacted on vishal.bhat@klaw.in.
The Government of India under Section 6 (2) (i) of the Disaster Management Act, 2005 has issued an order and set out guidelines dated March 24, 2020 wherein all private establishments and offices are to remain closed and social distancing to be maintained for preventing the spread of COVID-19 for a period of 21 days commencing from March 25, 2020.
Taxmann’s Law Dictionary, D.P. Mittal, Taxmann’s Publications (p) Limited
‘Vis major’ is a latin term which translates to ‘act of God’.
Lebeaupin v. Crispin, [1920] 2 K.B. 714
DhanrajmalGobindran v. Shamji Kalidas & Co, AIR 1961 SC 1285. In Gujarat Urja Vikas Nigam Ltd. v. Tarini Infrastructure Ltd. &Ors. (2016) 8 SCC 743, it has been recognized that an ‘uncontrollable’ event as a factor that would qualify as an event of force majeure.
Section 32 of the Act reads as ‘Enforcement of Contracts contingent on an event happening – 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’.
Section 56 of the Act reads as ‘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’.
he Doctrine of Frustration in England developed, under the guise of reading implied terms into contracts. The court implies a term or exception and treats that as part of the contract. In the case of Taylor v. Caldwell (1861-73) All ER Rep 24, where it was first formulated the doctrine in its modern form. The court there was dealing with a case where a music hall in which one of the contracting parties had agreed to give concerts on certain specified days was accidentally burnt by fire. It was held that such a contract must be regarded “as subject to an implied condition that the parties shall be excused, in case, before breach, performance becomes impossible from perishing of the thing without default of. the contractor.”
In the case of M/s Alopi Parshad & Sons Ltd. v. Union of India, 1960 (2) SCR 793 it was held that ‘A contract is not frustrated merely because the circumstances in which it was made are altered. The courts have no general power to absolve a party from the performance of his part of the contract merely because its performance has become onerous on account of an unforeseen turn of events’
Section 2(g) of the Act stipulates that an agreement not enforceable by law is void. However, for invocation of frustration of a contract is not to be lightly resorted to. The position for invocation of the frustration of contract is succinctly elaborated in the English case of Sea Angels, 2013 (1) Lloyds Law Report 569 where it was held “In my judgment,
the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of the contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as “the contemplation of the parties”, the application of the doctrine can often be a difficult one. In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient; and that there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances.”
1954 SCR 310
AIR 1971 SC 1756
(2017) 14 SCC 80
C. COVID19: Whether can be used to invoke force majeure?
The outbreak of COVID-19 was declared a Public Health Emergency of International Concern on January 30, 2020 by the World Health Organisation (“WHO”). Subsequently, on March 11, 2020, WHO declared COVID-19 outbreak as a pandemic and reiterated the call for countries to take immediate actions and scale up response to treat, detect and reduce transmission to save people’s lives. In response to such a declaration by the WHO, the Government of India has issued an order under Section 6 (2) (i) and guidelines under Section 10 (2) (i)of the Disaster Management Act, 2005 (“DM Act”) dated March 24, 2020 stating that all commercial establishments and offices are to remain closed and social distancing to be maintained for preventing the spread of COVID-19 for a period of 21 (twenty-one) days commencing from March 25, 2020. Further, it also stipulates that restrictions are being imposed on the movement of people in India and that anybody found violating the guidelines are liable to be criminally prosecuted with both fine and imprisonment upto 2 (two) years.
It can also be observed that Section 6 of the DM Act authorizes the National Disaster Management Authority to take measures for the prevention of disaster, or the mitigation, or preparedness and capacity building for dealing with the threatening disaster situation or disaster as it may consider necessary. Thus, it becomes clear that the government has recognized that COVID-19 constitutes a ‘disaster’ under the DM Actand is of such a nature or magnitude so as to be beyond the control of individuals and the community and accordingly, has restricted the movement of people in India and order for closure of commercial and industrial establishments.
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Section 6 of the Disaster Management Act, 2005 reads as follows: 6. Powers and functions of National Authority.—(1) Subject to the provisions of this Act, the National Authority shall have the responsibility for laying down the policies, plans and guidelines for disaster management for ensuring timely and effective response to disaster. (2) Without prejudice to generality of the provisions contained in sub-section (1), the National Authority may — (a) lay down policies on disaster management; (b) approve the National Plan; (c) approve plans prepared by the Ministries or Departments of the Government of India in accordance with the National Plan; (d) lay down guidelines to be followed by the State Authorities in drawing up the State Plan; (e) lay down guidelines to be followed by the different Ministries or Departments of the Government of India for the purpose of integrating the measures for prevention of disaster or the mitigation of its effects in their development plans and projects; (f) coordinate the enforcement and implementation of the policy and plan for disaster management; (g) recommend provision of funds for the purpose of mitigation; (h) provide such support to other countries affected by major disasters as may be determined by the Central Government; (i) take such other measures for the prevention of disaster, or the mitigation, or preparedness and capacity building for dealing with the threatening disaster situation or disaster as it may consider necessary; (j) lay down broad policies and guidelines for the functioning of the National Institute of Disaster Management. (3) The Chairperson of the National Authority shall, in the case of emergency, have power to exercise all or any of the powers of the National Authority but exercise of such powers shall be subject to ex post facto ratification by the National Authority.
Guideline 17 of the Guidelines issued by National Disaster Management Authority dated March 24, 2020 stipulate that any violation of the guidelines shall render a person liable for prosecution under Sections 51-60 of the DM Act r/w Section 188 of the Indian Penal Code.
Section 2 (d) of the DM Act defines the term ‘disaster’ as means a catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or man-made causes, or by accident or negligence which results in substantial loss of life or human suffering or damage to, and destruction of, property, or damage to, or degradation of, environment, and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area
D. Express or Implied Terms: Rules for interpretation of contracts
Before answering this question, the question of express and implied terms in a contract, it is essential to understand certain basic principles of interpreting the terms of a contract, which are summarized as follows:
(i) The proper construction of a contract is a question of law. However, the interpretation of words and terms is a question of fact;
(ii) Though judgments are binding for the purpose of deciding questions of law, such authority can be easily distinguished on facts;
(iii) In construing a contractual document, the entirety of the contract must be construed and an effort must be made to harmonize the individual parts into the whole;
(iv) In interpreting contracts, courts will look at the intention of the parties. The intention of the parties is the meanings of the words that they have used in the contract;
(v) The language or construction of one document does not afford must assistance to the construction of another;
(vi) A contract should be read and construed as it reads, as per its express terms and not to be explained by antecedent negotiations which led up to it; and
(vii) Terms may be implied into a contract as long as it is not inconsistent with any express terms of a contract or general tenor and can easily be formulated.
These principles can be seen in the case of Union of India v. M/s. D.N. Revri & Co. and Ors. where it was held “It must be remembered that a contract is a commercial document between the parties and it must be interpreted in such a manner as to give efficacy to the contract rather than to invalidate it. It would not be right while interpreting a contract, entered into between two lay parties, to apply strict rules of construction which are ordinarily applicable to a conveyance and other formal documents. The meaning of such a contract must be gathered by adopting a commonsense approach and it must not be allowed to be thwarted by a narrow, pedantic and legalistic interpretation.”
While interpreting the terms of a contract, the guiding principle is that one must rely on the express terms of such contract. However, Courts are increasingly trying disputes where certain terms of a contract are ambiguous and more than one interpretation is possible. In such scenario courts have been guided by two theories, the ‘objective theory’ and ‘subjective theory’ However, as times have evolved, courts have consistently adopted the principle that interpretation of contracts must be made so as to achieve efficacy of the terms to govern business dealings. In the case of Mumbai Metropolitan Region v. Unity Infraproject Ltd. , it has been held that “A business like interpretation of contractual provisions must be adopted in construing contracts entered into by persons of business to govern business dealings. The Court must ensure that interpretation of law in commercial cases must not be disjointed from the intent and object which those having business dealings seek to sub-serve. Unless interpretation of contracts effectuates a business meaning for persons of business, the law will not fulfill its purpose and object of being a facilitator for business and providing a structure of ordered certainty to those who carry on business here. The legal system must innovate constantly to keep abreast with rapid changes in technology and business.”
In the case of M. Arul Jothi v. Lajja Bal it has been held that “Once parties enter into a contract then every word stated therein has to be given its due meaning which reveals the rights and obligations between the parties. No part of the agreement or words used therein could be said to be redundant.”
Further, in the case of United India Insurance Co. Ltd. v. Manubhai Dharmasinhbhai Gajera the Supreme Court had considered the circumstances when reading an unexpressed term in an agreement would be justified on the basis that such a term was always and obviously intended by and between the parties thereto.
In the case of Satya Jain v. Anis Ahmad Rushdie, the Supreme Court had emphasized on the principle of business efficacy. It was held that the principle of business efficacy is normally invoked to read a term in a contract to achieve the result or the consequence intended by the parties, acting as prudent businessmen. Thus, the test of business efficacy requires a term to be implied only if it is necessary to give business efficacy to the contract to avoid such a failure of consideration that the parties would not have reasonably foreseen. Further, the business efficacy test, should be applied only in cases where the term that is sought to be read as implied is such which could have been clearly intended by the parties at the time of making of the agreement.
The law on interpreting a contract and interpretation of express and implied terms was finally decided in the case of Nabha Power, and a penta-test was required to be fulfilled for implying terms into a contract, which are as follows: (1) it must be reasonable and equitable; (2) it is necessary to give business efficacy to the contract; (3) the Officious Bystander Test; (4) it is capable of clear expression; and (5) must not contradict any express term of the contract.
Hence on an analysis of the law relating to express and implied terms, it becomes clear that contracts are normally to be interpreted in accordance with the clauses in any agreement and they have to be given their plain, literal and grammatical meaning, and terms may be implied in a contract only if they find that the literal interpretation fails to portray the intention of the parties.
To understand the principles of contract interpretation as written above, let us study the example of a typical example of a ‘force majeure event’ clause where contracts specifically provide for a force majeure clauses but without the using of the word epidemic or pandemic or COVID-19, which is as: ‘The Promoter, based on the approved plans and specifications, assures to hand over possession of the [Apartment/Plot] on, unless there is delay or failure due to war, flood, drought, fire, cyclone, earthquake or any other calamity caused by nature affecting the regular development of the real estate project (“Force Majeure”)’. In this example since the contract includes a force majeure clause, using the interpretational tests as stipulated by the Supreme Court, we can literally interpret the term ‘calamity’ meaning ‘a disastrous event marked by great loss and lasting distress and suffering’ i.e., a disaster and hence, invoke force majeure. Where the contract is silent on force majeure, using the penta-test as stipulated by the Supreme Court in Nabha Power, we may imply and interpret the meaning and purport of COVID-19 as constituting a ‘disaster’ under the order and guidelines of the National Disaster Management Authority under the DM Act or notifications by other authorities.
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Nabha Power Ltd. (Npl) vs Punjab State Power Corporation, Supreme Court of India, May 17, 2018 (Indian Kanoon)
(1961) 3 SCR 1020
The Objective Theory on formation of contracts may be summarized as thus: ‘A contract has, strictly speaking, nothing to do with the personal, or individual, intent of the parties. A contract is an obligation attached by the mere force of law to certain acts of the parties, usually words, which ordinarily accompany and represent a known intent’. Hotchkiss v. National City Bank, 200 F. 287 [S.D.N.Y. 1911]. Contracting parties must be made to know that it is their written words that constitute their contract, not their intentions that they try to express in the words. They, not the court, have chosen the words; and they, not the court, have made the contract. Its legal operation must be in accordance with the meaning that the words convey to the court, not the meaning that they intend to convey.
The Subjective Theory on formation of contracts may be summarized as ‘relying on the intention of the parties as the principle factor for deciphering contractual terms. It is heavily depended on the concept of consensus ad idem, or the meeting of minds, without which there is no contract formation’.
2008 (5) BomCR 196
AIR 2000 SC 1122
(2008) 10 SCC 404
(2013) 8 SCC 131
Ibid. 21.
Draft Agreement for Sale under the Real Estate (Regulation and Development) Act, 2016
The Merriam-Webster Dictionary, Online Edition, https://www.merriam-webster.com/dictionary/calamity (April05, 2020)
This interpretation is supported Circular of the Karnataka Real Estate Regulatory Authority vide Circular dated 04/04/2020 bearing No. Sec.CR.04/2019-20 recognizing force majeure as a disaster, wherein inter-alia, it has decided the following: (a) All registered projects having project end date on or after 15/03/2020, the period of validity is extended by 3 months. Registration Certificate with revised timelines are to be issued at the earliest. (b) Statutory compliance’s due in March/April/May are extended to 30/06/2020.
The Ministry of New & Renewable Energy has directed all renewable energy implementing agencies to treat delay on account of disruption to the supply chain due to COVID-19 as a force majeure event; Ministry of Shipping has issued an advisory to all Major Port Trusts for invoking ‘Force Majeure’ clause on port activities and port operation.
E. Conclusion:
Based on above, we understand that it is to be seen whether provisions relating to ‘force majeure’ have been included as express terms of an agreement or not and where it is included, COVID-19 may constitute an event of force majeure. However, every contract is different and a generalized interpretation of ‘force majeure’ including COVID-19 as an even constituting force majeure cannot be provided. Where the contract is silent on the terms of force majeure and for invocation of force majeure, only on satisfaction of the penta-test of implied terms, can it be read into a contract. It is also to be seen whether COVID-19 will stand the test of court of being a notified disaster constituting an event of force majeure or whether it will only constitute an event that has led to contractual obligations becoming onerous or costly to perform.
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For private circulation only
The material contained in this alert is for informational purposes only. The views expressed are not those of K Law and do not constitute legal advice. K Law disclaims all liability to any person or entity for any loss or damage caused by errors or omissions in this alert. The authors of this article are Mr. Pardeep Ratnam (Senior Partner and Mr. Vishal Bhat (Partner).
Website: www.klaw.in
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