Impact of Force Majeure Clause and COVID- 19 in Contract

Impact of Force Majeure Clause and COVID- 19 in Contract

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Introduction to Force Majeure 

The term “force majeure” describes such uncontrollable events, which go way beyond the control of the parties to the contract, such as war, natural disasters, etc., and make it impossible to perform the contract.

Almost all commercial contracts consist of a clause related to force majeure so that the parties to the contract are not held liable for breach of contract due to a sudden occurrence of any uncontrollable event. This clause enables such a contract to be suspended temporarily or permanently, depending upon the circumstances, and the party to perform the contract shall be relieved from such obligation. 

Provisions of the Indian Contract Act, 1872

Section 32 

It declares the enforcement of contingent contracts. It refers to such a contract, whose performance depends upon the occurrence of uncertain future events. This section clearly says that the contract becomes void if such an event becomes impossible.

Section 56 

It says that an agreement is said to be void if it relates to performing an impossible act. This provision also says that if, after the contract is made, the act promised becomes impossible or unlawful, and that event is not within the control of the parties, then also the contract becomes void. 

Case study: Satyabrata Ghose vs Mugneeram Bangur & Co., and Another (1954 AIR 44)

Facts:

In this case, Mugneeram Bangur & co, the respondent, is the owner of a large tract of land situated in the vicinity of the Dhakuria Lakes within Greater Calcutta. The company started a scheme named Lake Colony Scheme No. I for improvement of land for residential purposes and offers were invited from purchasers. The company planned to accept only a small part of the consideration money at the time of the agreement. The company planned to start construction of roads and drains, making the lands proper residential purposes so that the purchaser would complete the payment of the balance. 

Bejoy Krishna Roy, defendant No. 2 who entered into a contract with the company for the purchase of a plot on 5th August 1940 by paying Rs. 101 as earnest money. The company agreed to sell him or his nominee, the portion of his land and on 30th November 1941, Satyabrata Ghosh, the plaintiff-appellant was made a nominee by Mr Bejoy Krishna Roy.

A sudden order passed by the Collector, on 12th of November, 1941 of the Defence of India Rules, resulted in one portion of that land to be requisitioned for military purposes and another part to be requisitioned by the Government on 20th of December, 1941. 

In November 1943, the company addressed a letter to Bejoy Krishna Roy informing him of the requisitioning of the lands and hence, the construction of the roads and drains could not be carried on during the continuance of the war. So, the company decided to treat the agreement as cancelled and gave an option of taking back the earnest money within one month or to complete the transference within one month from the receipt of the letter by paying the balance consideration and said that the company can continue the construction after the dissolution of the war or in case, any of the two alternatives are not accepted by the purchaser, the contract would be considered to be invalid and the earnest money would stand forfeited. 

The plaintiff refused to accept the offers and on 18th of January, 1946, filed a suit against the defendant and prayed that the Court directs the Respondent Company to execute the Sale Deed. The Alipore Court allowed specific performance against the Respondent Company.

An appeal filed by the defendant to the District Judge of Parganas was dismissed on the 25th February 1949. The defendant appealed to the High Court and it held that the Sale Contract was frustrated by the Requisition Orders of the Government and dismissed the suit. And hence, an appeal was filed to the Supreme Court.

Issue:-

Whether a contract for sale can dissolve or come to an end due to certain supervening circumstances which affected the performance of a material part of the agreement?

Judgement:-

The doctrine of frustration is an aspect or part of the law of dissolution of contract by reason of supervening impossibility of the act agreed to be done and comes under section 56 of the Indian Contract Act. The Court also held that the act of the parties at a particular time is important to observe for the court to give the appropriate relief.

The Supreme Court said that there was no time limit within which the roads and drains were to be constructed. As a matter of fact, the first requisition order was passed about 15 months after the contract was signed and no work was done by the defendant company till then. Therefore, the commencement of work was delayed.

The requisition order only imposed a prohibition on the use of the land during the period of war. The events of requisition cannot be said to have made the performance of the contract impossible and the contract has not been frustrated and hence, the appeal was allowed.

Case study: The Naihati Jute Mills Ltd vs Hyaliram Jagannath (1968 AIR 522)

Facts:-           

In this case, a contract was signed between the appellants and the respondents on the 7th July 1958, and the respondent agreed to sell two thousand bales of jute to the appellant. The contract provided that the shipment was to be made within 3 to 4 months from the contract signed, as the import of Pakistan jute required an import license. It was written on the contract that the buyers are supposed to provide the import license to the seller prior to one month of the shipment but if buyer fails to deliver the license by December, then the contract would be settled at the market price prevalent on January 2, 1959, and it was also provided that there would be an increase of price by that time.

It was also provided in the said contract that all the disputes related to the contract or its termination are to be settled before the arbitration of the Bengal Chamber of Commerce. 

The appellants applied twice to the Jute Commissioner to certify the license but the Commissioner refused. So, the respondents claimed damages on the ground that the appellants had failed to furnish the license and refused to pay.

The disputes were referred to the Tribunal. The Tribunal passed an award of Rs. 34,000/- along with interests against the appellant. Thereupon, an appeal was filed to set aside the award before the High Court of Calcutta.

The Division Bench agreed with the learned Single Judge that the arbitrators were competent to adjudicate such a dispute and the appellants failed to prove any legal misconduct on the part of the arbitrators and the appeal was dismissed. The issues that arose were the following:

Issues:-

1. Whether the contract can be treated void if the contract became impossible to perform due to a change in the Government policy?

2. Whether the arbitration clause also becomes void, if the contract itself no longer exists?

Judgement:-

The Supreme Court observed that the Government had not put a full restriction on the import of Pakistani jute and therefore the contract could not have been said to be frustrated.  The Courts do not have any power to release any of the party from the performance of its part of the agreement merely because of an unexpected turn, even if the performance by a party becomes difficult.

Therefore, the SC didn’t find any reason for the impossibility of performance of the contract, for which the contract should be held void. And hence, as the said contract cannot be said to be void, so the arbitration clause in the contract was also held to be valid and consequently, the arbitrators had no jurisdiction cannot arise.

Case study: M/S Haliburton Offshore Services vs Vedanta Limited & Anr on 29 May 2020

Facts:-

In this case, the parties had entered into a contract on 25th April 2018 for the construction of an oil well and development of surface facilities by the petitioner. There were three sub-projects of the contract, namely, Mangala, Bhagyam and Aishwarya and the commencement date of these three sub-projects were 17th January 2018. The contract also mentioned the completion date of the three sub-projects, Mangala, Bhagyam and Aishwarya as 16th January, 16th March and 16th June of the year 2019, respectively. But, as the project remained uncompleted, all the three projects were given an extended deadline up to 31st January, 29th February and 31st March of the year 2020, respectively. But the projects remained incomplete.

The petitioner invoked the Force Majeure Clause to seek more extension, on the ground of Lockdown situation, raised due to COVID-19 but the Respondent proposed for the termination of Contract. As a result, the Petition was filed under Section 9 of Arbitration and Conciliation Act 1996 on 13th April 2020, before the Delhi High Court seeking interim relief to restrain the Respondent from taking any strong action against the Petitioner. 

Issue:-

Whether the restrictions imposed by COVID- 19 can become a plea for the frustration of commercial contract?

Judgement:-

The Delhi High Court, at first, considered the case of Energy Watchdog vs Central Electricity Regulatory Commission (2017) 14 SCC 80, where the Apex Court held that courts do not have the power to release the parties from performing the contract, except in some exceptional circumstances.

Thus, the Delhi High Court observed that the Project was time-sensitive under the contract, and it is a must to perform the contract, within such specified time. The Court also observed that there was little or no progress of work done by the petitioner in the project, even before the lockdown.

Therefore, the High Court of Delhi found that the Petitioner had committed a breach of Contract much before the situation of Covid-19 and also said that every breach and non- performance of contracts cannot take a plea of this pandemic and held the petitioner liable. 

Analysis and Conclusion

It will be incorrect to say that the situation of Covid-19 and lockdown is not considered as a plea justifying certain breaches of contract. But, it is important for the parties to try their best to perform and execute such a contract.

In the case of M/S Halliburton Offshore Services vs Vedanta Limited & Anr, if the petitioner has shown genuine progress in its work from the commencement date till the date before the lockdown started, the court may have granted a further extension. But the petitioner had not worked even before the lockdown situation had arisen and hence, the petition was dismissed by the Court.

It is important to conclude that in most probably every case, the court sees the genuineness of the work done. And the party to the contract should genuinely try to perform its obligation towards the promise. 


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Monika Mukherjee

Author

Monika hails from IFCAI University, Dehradun and she spends most of her time in painting and sketching. Her Interest area lies in laws for women and their protection. For any clarifications, feedback, and advice, you can reach her at monikamukherjee2307@gmail.com

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