Author of the Article:

PASCAL SASIL R

Introduction

COVID-19, the virus that incubated in Wuhan is now all over the face of the Earth, threatening the existence of mankind as a whole. Besides the mainstream challenges that it has brought, the pandemic has also opened the doors to a plethora of other issues. Legal complications too have sprung up with law playing a crucial role to set the balance right in a situation like this. While the legal complications themselves range from human rights in lockdown to keeping a check on cybercrimes, complications regarding the business and trade sector are of prime importance considering the fact that they might potentially decide as to how the entire community copes up and rebuilds following a pandemic. Further, businesses are all about contracts and obligations. Thus, the legal issues surrounding contracts are of huge concern to the whole world. Further, its vast repercussions will have a major influence on various other disciplines like economy, governance etc.

Force Majeure and the air of uncertainty during COVID-19

Force Majeure, a legal jargon has undoubtedly become the talk of the world in recent times. The term became quite relevant among the masses following the pandemic scare and its relevance in contract law. Force Majeure in literal language signifies an Act of God, which leads forth to unforeseeable circumstances that prevent someone from fulfilling a contract. With supply chains being disrupted all over the world[1], performances under the contracts are also expected to be disrupted. In the worst case, termination of contracts too is a possibility. In an ideal sense, the invoking of Force Majeure clause seems justified, considering the gravity of the emergency like the situation at hand. However, there are a lot of unanswered questions and a subsequent air of uncertainty surrounding it.

Some questions and concerns regarding the same that have come to the forefront include:

  • Dealing with unwarranted invoking of Force Majeure by a party as an excuse to terminate an unfavourable contract.
  • What will be the fate of contracts that do not have an existing Force Majeure clause?
  • Approaching Force Majeure complications surrounding special contracts such as cross border international contracts.
  • Issues surrounding Contracts with Sovereign entities.
  • Resolving disagreements over invoking of the Force Majeure clause and subsequent loss responsibility.
  • Who is responsible for the losses of an end customer in case of disruption of supply chain?
  • Approaching the litigation suits from these end users.

Thus, these complications have their base in how the Governments and the Courts decide to approach this double-edged sword, Force Majeure. Nations across the world have approached it different ways. China through its Council for the Promotion of International Trade has issued over 5,600 Force Majeure certificates to various establishments[2], thus bringing COVID-19 under Force Majeure’s ambit, and thus entailing it as an Act of God. We must also keep in mind that China has its own reasons to do so with the international community accusing China of coronavirus, terming it as a bioweapon of mass destruction. Thus, in the Chinese case, bringing COVID-19 under Force Majeure might be to shift the blame game away from itself.

Indian Contract Act, 1872

In the Indian context, Sections 32 and 56 of the Indian Contract Act, 1872[3] deal with this. While Section 32 deals with Enforcement of contracts contingent on an event happening, Section 56 states that an agreement to do an act impossible in itself is void. While there is no express mention of the clause, the provisions explain the same. Thus, mutual invoking of the clause should not have any legal issues. However, things do get complicated when there is disagreement expressed from one or more parties involved in the contract or if there is no such Force Majeure clause in the contract. An age-old common law doctrine comes in at this point, Doctrine of Frustration, that is used to terminate or hold contracts where it is impossible to perform the contract due to an unforeseen event. The Doctrine was first given in the landmark case of Taylor v. Caldwell[4] and has evolved ever since then with the Indian courts too having a say on the same in the past.

The necessary criteria to be fulfilled for invoking Force Majeure becomes the next concern. Most courts have expressed a trend of reading Force Majeure in accordance to their plain language and thereby interpreting it the widest of margins, keeping the situation in hand as the cornerstone while coming to a conclusion. Hon’ble. Supreme Court of India too, has expressed the same views in terming Force Majeure as a clause of wider ambit in the case, Dhanrajmal Gobindram v. Shamji Kalidas[5]. Coronavirus is not a one-off incident and hence a concrete, binding rule becomes a must. The centre has been quick enough to protect its Governmental Departments by issuing a memorandum through its Ministry of Finance, asking the departments to invoke Force Majeure clause in case of supply chain disruption. Thus, a green signal has been given to consider COVID-19 as a Force Majeure event[6]. Having said this, the effect of the office memorandum on general contracts is still ambiguous. The memorandum makes it clear that invoking Force Majeure does not amount to non-performance in its entirety and possible actions like a temporary hold, renegotiation and amending terms of contract are to be taken. Thus, the yardstick to invoke the clause will probably boil down to supply chain disruption or any event that makes the performance under the contract impossible and the event ought to be linked directly to COVID-19.

Conclusion

Although it is impossible to arrive at solutions for the same, certain prompt actions like informing and communicating to the other party at the earliest by sending notices in accordance with the contract and providing all the evidences behind non performance and establishing the links to COVID-19 will ease out the situation and help in a smooth run. With COVID-19 still an ongoing crisis, its impact on businesses and losses due to the same are going to see an upward rise bringing up critical legal issues and we ought to be canny enough to face the same.

References


[1] Fred Schmalz and Kellogg Insight, The coronavirus outbreak is disrupting supply chains around the world — here’s how companies can adjust and prepare, BUSINESS INSIDER, (Mar. 26, 2020), https://www.businessinsider.com/covid-19-disrupting-global-supply-chains-how-companies-can-react-2020-3?IR=T

[2]China force majeure certificate issuance pass 5,600 amid virus outbreak – trade body, REUTERS, (Mar. 11, 2020) https://www.reuters.com/article/health-coronavirus-china-forcemajeure/china-force-majeure-certificate-issuance-pass-5600-amid-virus-outbreak-trade-body-idUSL4N2B43CK

[3] The Indian Contract Act, 1872 (Act no. 09 of 1872 dated 25th April 1872).

[4] Taylor v. Caldwell, EWHC QB J1, (1863)

[5] Dhanrajmal Gobindram v. Shamji Kalidas, (1961) 3 SCR 1020 (India).

[6] Republic of India, Department of Expenditure, “Office Memorandum on Force Majeure Clause (FMC)”, (Ministry of Finance, 2020), available at: https://doe.gov.in/sites/default/files/Force%20Majeure%20Clause%20-FMC.pdf