COVID-19: A Force Majeure in India?

by Abha Kashyap Managing Patner

Force Majeure is a French word which translates to ‘superior strength/force’ and in legal aspects means unforeseeable circumstances that prevent someone from fulfilling a promise or obligation. Even though it was originally used in French law the principle has become widely famous in contract and insurance law all over the globe. The principle included act of God, natural calamity and unforeseeable and uncontrollable events that prevent an individual from performing the promised part of the contract. The occurrence of force majeure event protects a party from the liability of failing to perform a contractual obligation.

Unlike in civil law countries, the concept of force majeure has to be introduced by explicitly and unambiguously mentioning it in a contract. In India, “Force Majeure” is indirectly governed by the Indian Contract Act, 1872 (ICA) through Frustration of Contracts and Contingent Contract (Section 54 & 32 respectively). Most business surely upon the sanctity of contracts, making it crucial to the stability of the economy as a whole. If the contract fails to include a force majeure clause, the parties have the recourse of provisions of ICA.

The outbreak of the COVID-19 corona virus has not only slowed the economy but has halted it as the country observes 21 days of lockdown and imposition of Section 144 of the Code of Criminal Procedure,1974(CrPC) in various parts of the country. Section 144 of CrPC imposes several stringent restrictions on commercial activity in the area. Similar restrictions have been imposed by countries all over the world. The major impact of this lockdown is being seen on businesses that rely on day to day operations and are consumer based.

On 19^th February 2020, the Ministry of Finance, Department of Expenditure; Government of India clarified via official memorandum to all Central Government Ministries/Departments that the COVID-19 outbreak will be covered Force Majeure clauses (FM clauses). It also directed that the global spread of virus should be considered as a case of natural calamity and the FM clauses may be invoked if appropriate and with due procedure.

The ministry referred to the definition and due procedure of Force Majeure provided in the para 9.7.7 of the “Manual for Procurement of Goods 2017” as: “A Force Majeure means extraordinary events or circumstance beyond human control, such as, an event described as an act of God (like a natural calamity) or events such as war, strike, riots, crime (but not including negligence or wrong-doing, predictable/seasonal rain and any other events specifically excluded in the clause)”. An FM clause in the contract frees both parties from contractual liability or obligation when prevented by such events from fulfilling their obligations under the contract. An FM clause does not excuse a party’s non-performance entirely, but only suspends it for the duration of the FM. The firm has to give notice of FM as soon as it occurs – it cannot be claimed after the fact. There may be a FM situation affecting the purchase organisation only. In such a situation, the purchase organisation is to communicate with the supplier along similar lines as above for further necessary action. If the performance or delayed by any reason of FM for a period exceeding 90 (Ninety) days, either party may at its option terminate the contract without any financial repercussion on either side.

On the basis of several precedents set by Indian courts over the years, the word impossible to perform the promise does not encompass only the physical and literal impossibility but also included impractical and useless performance of the promise.

COVID-19 has caused a decisive blow to India’s renewable energy goals of 2022 by causing disruptions in several wind and solar energy project all over the country. The Ministry of New and Renewable Energy (MNRE) and the various agencies affiliated to the ministry have declared that the delays caused by the disruption to supplies from China and other countries will treated as force majeure events. The move of the ministry comes as a relief to the developers facing delay fees due to shortage of supplies.

India’s Ministry of Shipping advised ports few days ago to consider invoking force majeure on the basis of COVID-19. Since then several ports of India including Adani-Mundra, Hazira, Angre, Dhamra, Karaikal, Gopalpur, Gangavara,, Krishnapatnam and 44 ports under Gujarat Maritime board have declared force majeure. The principle is evoked in the light of ports being declared as essential services and ordered to remain open during the lockdown. Therefore, act of imposing force majeure could be seen as a precaution towards the possibility of any claims, damages and charges arising due to the unforeseen delay and measures during the pandemic.

In lieu of the lockdown passenger trains have been halted and only freight trains are functional. On 27^th March 2020, the Indian Railways made an announcement that the period from March 22 to April 14 will be treated under ‘force majeure’ during which various freight charges such as demurrage, wharfage, stacking, detention and ground usage charges shall not be levied. The Railway Ministry is also contemplating about converting non-operational passenger train coaches into isolation wards for temporary hospital facility.

There is no denying that the outbreak of COVID-19 has caused and will ultimately cause the delay and interruption of all major and minor projects that were planned to be delivered within the first quarter of the year leaving no sector of economy immune. As force majeure event covers events that are out of control of the parties, application of force majeure in such a scenario will vary depending on the ability of the party to perform the contract and its obligations.

Originally publish on www.kpalegal.com on 30 March 2020