Overcoming Force Majeure amid Post Coronavirus Pandemic: Lawyers Advice on Indian Corporate Laws | Corporate Law Advice in Delhi NCR | Corporate Lawyer in Delhi NCR | Corporate Attorney in India
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Coronavirus or Covid-19 has been declared as a global pandemic by the World Health Organisation and has resulted in complete lockdown in various countries across the world. This has resulted in the stoppage of work in both private and public sectors leading to a lot of default in the fulfillment of the contractual obligations. Therefore, it in light of the global impact of Covid-19, it important for businesses to review their Force Majeure Clause in contracts to understands its relevance in the current scenario and in order to understand how to defend themselves in case force majeure is invoked against them.
Force Majeure which is also known as Vis Majeure means ‘Superior Force’. It is used to protect the parties of a contract against it’s breach or non-performance when it is caused due to an even or conditions like acts of god, terrorism, government action, war, etc, which is outside the control of the parties. Such events are unpredictable, unforeseen and have a substantial or material effect on the performance of the contract. The Hon’ble Supreme Court in the case of Dhanrajmal Gobindram vs. Shamji Kalidas, (1961) 3 SCR 1020, held that the purpose of Force Majeure is wide and is intended to protect the performing party from any liability which arises from an event which is uncontrollable. However, Force Majeure is often claimed by people in order to avoid liability for breach of contract wherein their part of contract was very well capable of being completed by them. Therefore, in order to protect the right of the other party in the contract, who might have suffered losses to due non-performance of the contract and the performing party is claiming Force Majeure, the following defenses can be taken:
EVENT DOES NOT FALL UNDER THE PURVIEW OF THE FORCE MAJEURE CLAUSE: In order to claim Force Majeure, the Court has be satisfied that the event claimed under Force Majeure actually falls under the ambit of the Force Majeure clause of the contract, which are viewed as exhaustive in nature. In case the event is covered by the contract, no defense of Force Majeure can be claimed.
SELF-INDUCED OR NEGLIGENCE: A person cannot claim the defense of Force Majeure in case the impossibility of completing the contract is caused due to the party’s negligence or is purposely induced by the party to dodge his obligations under the contract.
ALTERNATE ROUTES AVAILABLE: A party cannot claim Force Majeure in a contract where the performance has become impossible through a particular route, however, can be fulfilled through an alternate route though it might not be as profitable.
MERE INCONVENIENCE OR DIFFICULTY IS CAUSED: No defense of Force Majeure can claimed by the party on the mere ground that the fulfillment of the contract has become difficult or less profitable for the party. Like in the case of Naihati Jute Mills Ltd. v. Hyaliram Jagannath, 1968 (1) SCR 821, the Hon’ble Supreme Court of India held that the frustration of contract cannot be claimed on the mere ground that the circumstances under which the contract was made have changed or altered. Courts cannot absolve party from contractual obligations only on the ground that the performance as become onerous in lieu of unforeseen events.
PROCEDURAL DEFECTS: In order to invoke Force Majeure, it is necessary for the party invoking it to send a notice to the other party within 30 days from happening of the such event intimating them about Force Majeure and also the party should take all the steps to ensure that his obligation is fulfilled and minimum loss is caused to the other party. No claim of Force Majeure can be made unless the above procedural aspects are strictly followed.
In Standard Retail Pvt. Ltd. v. M/s G.S. Global Corp & Ors., (Commercial Arbitration Petition (L) No. 404 of 2020) A petitioner under Section 9 of the Arbitration and Conciliation Act was filed before Hon’ble Bombay High Court seeking an interim relief of restraining respondent bank from encashing the Letter of Credit. The Petitioner is an importer of steel who entered into a contract to import steel from manufacturer based in Korea. The petitioner has caused a Letter of Credit issued by Wells Fargo Bank in favor of their Korean based supplier. The contract was to be carried on cost and freight basis. The petitioner claimed frustration of the contract under section 56 of the Indian Contract Act 1872 on account of impossibility, inability and unenforceable, hence, seeking an order restraining bank from encashing Letter of Credit.
The plea of the Petitioner for an Interim relief was denied the Court on the following grounds:
1) The Letter of Credit transaction was completely different and independent transaction and the Bank is not concerned with the given dispute between the parties.
2) Further, as per the guidelines issued by the government in the light of Covid-19 pandemic, distribution of steel has been declared as an essential service, therefore, there is no restriction on its movement and further, all the ports and the port related activities are also categorized as essential service. In the light of the same there is no restriction on the business of the Petitioner due to lockdown and hence, he is not entitled to claim Force Majeure.
3) The respondent has completed his part of contract by shipping the goods and therefore, the Petitioner cannot claim Force Majeure to deny the payment if he cannot complete the purchase and would suffer damages.
4) Lockdown is for a limited period of time and hence, cannot be used as an excuse to not comply with his part of the obligation under the contract, especially so when no restriction has been put on the business activity.
Therefore, Force Majeure is a good defense against breach of contract but does not provide a blanket protection to the defendant. The Court has to be satisfied that the situation was such that the obligation was impossible to fulfill the contractual obligation and there was no alternative way of fulfilling the obligations. Hence, the law does not let the party to breach contract in order to run away from their obligations but only protects them in cases where it is necessary and provides recourse to the other party in case false claims of Force majeure are made.
Authored By: Adv. Anant Sharma & Ananya Jain