Companies to use Force Majeure Clause during COVID-19

As we all are well aware of the fact that COVID-19 pandemic is affecting every individual worldwide, irrespective of the fact that he or she is affected mentally or economically. In this article, the effect of COVID-19 on businesses (economy) is being highlighted. Moreover, the businesses on the international level are being affected and the main reason for the same is the incompetence of the companies to complete their respective contracts. The question here arises that whether they (companies) can shift the blame of being incompetent on COVID-19 pandemic and if so, then can it be termed as an ‘act of God’. All these questions shall be answered in this article.

Introduction

According to some eminent personalities and law experts too, a company who does call for “Force Majeure” is required to prove its incapability to perform the contractual obligations. It would be merely impossible to get rid of the financial liability if the company cannot prove that the reason for it’s the incapability to perform contractual obligations is the sudden outbreak (COVID-19).

What is Force Majeure?

Force majeure is a French term that means “an act of God”, an event for which no party can be held accountable such as a hurricane or a tornado or an armed conflict, for example, two businesses do exist say A and B, where A needs to deliver something to B and B needs to pay A for the same here because of COVID-19 (lockdown). Here, A or B shall not be held liable if they fail to perform their respective contractual obligations provided that their contract must have the clause of “force majeure”. Generally, for the events to constitute force majeure, they must be unenforceable, external to the parties to the contract and unavoidable too. Force Majeure clause protects a party from any financial liability for its failure to perform a contractual obligation. 

Laws related to Force Majeure in India

According to the Indian contract act, 1872 which determines the circumstances of which promises in a contract shall be legally binding. The act is silent on the term “force majeure” but the act allows an agreement for performing an impossible act. Which means that if the parties to the contract are unable to meet the promises because of an impossible act or circumstances then the contract would be cancelled. The Force majeure clause cannot be implemented under Indian law. It must be expressly implied. 

Is COVID-19 a Force Majeure event?

The term Force Majeure rarely covers an endemic or pandemic, it is only used for an earthquake or a volcano or any other kind of natural calamity. Finance minister in February clarified that disruption in the supply chain due to the spread of coronavirus qualifies as a force majeure event and the companies can invoke the force majeure clause.

What will happen to the contracts with the Force Majeure clause?

The contracts having the force majeure clause will have the resolution probability on a higher scale as compared to the contracts not having it. But the misuse of force majeure clause does exist as it likely to happen that companies may face allegations that it has used the COVID-19 situation to escape out of payment and performance.

What will happen where contracts do not have the Force Majeure clause?

The answer to the above-mentioned question is section 56 of the Indian Contract Act,1872. The section deals with the situation of “frustration of contract” which means a situation where fulfilling a contract becomes merely impossible or unlawful after signing the contract. Traditionally courts have chosen a narrow interpretation of the law in the ruling of disputes where section 56 have kicked in. According to the analyst, proving frustration is more difficult than proving Force Majeure.

Nevertheless Force Majeure

 A large number of cases will be a big problem for economic growth even after the fall in COVID-19 cases. According to the many experts, this will not only impact the port sector but also other sectors including the cross-border trade, real-estate, EPC (Engineering, procurement and construction) and plain joint ventures agreements as well as merger and acquisition deals.

India lockdown: ports declare force majeure ship operations go awry

This above-mentioned statement is a news headline which read as “due to lockdown in India ports have declared Force Majeure and the operations of the ship have shut down”. Approximately half a dozen of ports that is 6 ports including a port in Krishnapatnam, Mundra. Tuna, Gopalpur, Karaikal, Gangavaram and Dhamra have declared Force majeure. About $829 billions of goods travelled through Indian ports in 2018, the 13th most in the world.

Other countries declaring Force Majeure

China invoked “Force Majeure” to protect the business. According to the Chinese council for the promotion of international trade, China has issued 4811 force majeure certificates as of 3rd March due to the epidemic. ArcelorMittal, one of the leading and the largest steel manufacturers, also declared force majeure in Europe on the raw material. 

Relevant case laws

  1. Satyabrata Ghose v. Mugneeram Bangur & Co.
  2. M/s Alopi Parshad & Sons Ltd. V. Union of India
  3. Naihati jute mills Ltd. V. Hyaliram Jagannath 

Satyabrata Ghose v. Mugneeram Bangur & Co.

Court- Trial court, High court, Supreme court

Decided on- August 18, 1943

Acts- Section 56 of the Indian Contract act, 1872

Judge- BOSE, VIVIAN, BHAGWATI, NATWAR LAL H.

Appellant- Satyabrata Ghose 

Respondent- Mugneeram Bangur & Co.

Facts of the Case 

Mungeeram Bangur and Co. Were the owners of a large tract of land situated in the vicinity of the Dhakuria Lakes in the greater Calcutta. The Company started a scheme, for the development of the above land for residential purpose and in furtherance of the above scheme of the company divided the entire area into a large number of plots for the sale of which offers were invited from the intending purchasers. The company planned to enter into agreements with different purchasers for the sale of land and accepting only a small amount of money as consideration by the way of earnest money at the time of the agreement. Bejoy Krishan Roy, the defendant no. 2 in the suit and Performa respondent in the appeal, was some purchasers who entered into a contract with the Company for purchasers of a plot of land. The contract was made on 5th August 1940. The date was fixed on which a sum of rupees 101 was paid as earnest money to the company. On 30th November 1941 Satyabrate Ghose, the appellant, who was also the plaintiff, in this case, was made a nominee by Bejoy Krishan Roy the purchaser for the contract. Sometime before November 30, 1941, when the plaintiff was a nominee, there was an order passed by the Collector, 24 Parganas on 12th November 1941 under rule 29 of the Defense in India Rules on the Strength of which a portion of the land covered by the scheme was requisitioned for military purposes. Another part of the land was requisitioned by the Government on 20th December 1941 and third-order of the requisitioned which was related to the rest of the land was passed sometime later. In November 1943 Mugneeram Bangur and company, the respondent, addressed a letter to Bejoy Krishan Roy informing him that the government would retain possession on the land and in these circumstances, the Company was unable to construct the proposed constructions during the continuance of the war. Thus, the company decided to treat the agreement with the assignee as cancelled and gave him the option of taking back the earnest money within one month from the receipt of the letter. There was an offer made in the alternative that in case the purchaser refused to treat the contract as cancelled he could, if he liked, within one month from the receipt of the letter by paying the balance of the consideration money take the land in the condition which it existed at that time with full constructions as per the agreement after the termination of the war. 

Trial Court

On 18th August 1946, Satyabrate Ghose the plaintiff/appellant brought the suit against the defendant company on the following grounds-

  1. That the contract dated 5th August 1940 between the first and the 2nd defendant, is still subsisting; and
  2. That the plaintiff was entitled to get a conveyance executed and registered by the defendant on payment of consideration money. The suit was contested by the defendant company.

The trial Court overruled out all the please taken by the defendant and decreed the plaintiff’s suit.

Appellate court

Against this decision, an appeal was filed by the defendant company in the Court of the Judge of 24 Parganas which was dismissed and the judgement of the trial court was affirmed. The defendant Company filled the 2nd appeal in the Calcutta High Court against this order. 

High Court

The high court accepted the appeal and held the contract of sale as frustrated by the reason of requisition order issued by the government. Hence, the defendant is not responsible to complete the contract. 

Supreme Court

The plaintiff filed an appeal against the judgement of the Calcutta High Court in the Supreme court. The main question before the Supreme court was “whether the contract was frustrated within the meaning of the provisions of section 56 of the Indian Contract Act and the execution of the contract is impossible? Their Lordship discussed in detail the effect of the provisions of the law embodied in section 56 of the Indian contract act, compared them with the provisions of English law and observed that doctrine of frustration is an aspect or part of the law of discharge of contract by the reason of supervening impossibility or illegality of the act agreed to be done and hence, comes within the purview of section 56 of the Contract act, applies only to the cases of physical impossibility and that where this section is not applicable, recourse can be had to the principles of English law on the subject of frustration. It must be held also, 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 principle of English law. The decisions of English Courts have only a persuasive value and may help show how the courts in England have decided the cases under circumstances similar to those which have come before the Courts. With these observations, the appeal was allowed and the plaintiff’s suit was decreed with costs.

Conclusion

The fact that the applicability of Force Majeure depends upon case-to-case basis (situation to situation), must be clear in the mind of an individual. However, a clear definition of the subject matter of the same is being given the various case laws such as M/s Alopi Parshad & Sons Ltd. V. Union of India. Naihati jute mills Ltd. V. Hyaliram Jagannath, etc.

References

Leave a Reply

Your email address will not be published. Required fields are marked *