The present article has been written BY Stuti Shreya during her internship in LeDroit India.
The outbreak of Corona virus has brought a lot of changes in the components of a human ecosystem, be it science, social, economic, psychological or legal, the adverse effect of the virus seems to be far from getting repaired. It was on 11th march that WHO (World Health Organisation) declared corona virus as pandemic, since then there has been a shift of preferences from economic growth to saving lives. While the economy had taken a back seat there were some legal challenges arising out of the on-going business scenario. Talking about the contractual aspect, the term Force Majeure has gained much of relevance in the abiding pandemic. This article seeks to address the emergence of Force Majeure, its relevance in the Indian law, and analysing the recent judgment to dive into the topic even further.
Emergence of Force Majeure
The traces of Force Majeure can be tracked right to the Roman law; the Roman law cognize that the position of contractual performance and rights can be tampered by the principle of “clausula rebus sic stantibus”. This basically meant the duties and obligations arising out of Contractual relation are binding upon the parties as long as the persisting circumstances remain stagnant as they were at the time of entering the contract. This can also be understood from the very popular English case, Taylor v/s Cladwel, in this case; there was an agreement in between the parties for an event taking place in the music hall, the advances to rent the hall and garden were paid thereof. Before the event could take place an accidental fire destroyed the music hall. The plaintiff charged defendant for the non-performance of contractual obligation. The court after evaluating the conditions decided that the circumstance which is beyond the control of the parties can excuse a contractual obligation from being performed. The court summed up the standard of law as follows: “[a] contracts in which the presentation relies upon the proceeded with presence of a given individual or thing, a condition is suggested that the inconceivability of execution emerging from the dying of the individual or thing will pardon the performance.”[b] Without the show lobby, the exhibition of the two parties was pardoned. However, it evidently appeared in 19th Century in the case of Lebeaupin v Crispin [1920] 2KB 714. In India this case was also referred in the case of M/S. Dhanrajamal Gobindram vs M/S. Shamji Kalidas And Co on 27 February, 1964.
The Supreme Court expressed its intention to save the party from the non-performance of contractual obligation where the non-performance was a result of the circumstance over which the party had no control. In the case of both English and Indian Law, the term Force Majeure isn’t just limited to anything which is beyond the conduct of the parties relating to a contract. It is widely dependent on the specifications of the contract and words being used thereof. What cast a non-performance under the shadow of Force Majeure are the two conditions it meets. The very first one being, whether the non-performance falls under the ambit of Force Majeure, the second one being the non-performance was caused by that very event. It is also relevant to mention that Force Majeure can be specific or general or the coexistence of both. Any party that intends to seek a remedy under this clause may have to prove that they were not aware of the happening of the unforeseen event. Force Majeure is not just limited to an Act of God it can also be an existence of War or Regulations and Laws made by the Government rescind a contract. If in case the contract does not include the provision of Force Majeure then the Courts will look into the common law principles that have developed with the lapse of time. This can be inclusive of: frustration of purpose, impossibility to perform, impracticability of performance.
Force Majeure Relevance in Indian Contractual Laws
The concept talks about inability to perform a contractual obligation because of an unexpected change in the circumstance, and this change creates an impossibility to perform at that particular time frame. Taking for example the Indian lockdown post the declaration of 2020 pandemic, the state of stagnation must have created an impossibility to perform. But is this restrain momentary or permanent? Off course with the uplifting of the lockdown the contractual obligations could have been performed. The entire outlook of the concept is the cease of performance at a particular time frame; the contract does not cease to exist. Generally used akin with the Section 56 of the Indian Contract Act, Force Majeure is often presumed as frustration of contract. Referring back to the case of Taylor v/s Cladwel, in that case there was a destruction of subject matter; this would have inherently caused the contract to terminate as the obligations couldn’t be performed. Let us take a precise look over the difference in between Force Majeure and Doctrine of Frustration of Contract (section 56 of Contract Act). Doctrine of frustration talks about the cease of existence of contract, it is happening of an event after the execution of the contract which makes the contract impossible to be performed. The happening of the event should be outside the ambit of the contract. The entire extraction of the Doctrine is an impossibility to perform and termination of contract. It is not necessary to have an absolute impossibility to fall under Section 56, even if the contract has a fundamental change about which the parties didn’t contemplate beforehand. When it comes to Force Majeure, the approach is not to terminate the contract but to save the party from the repercussion of non-performance due to unfavourable circumstances. Unlike the Doctrine of Frustration the circumstances incorporated by the parties in the contract is prior to its execution. After the end of the pertaining condition, the parties have a choice to continue the contract or put an end to it. Here it must be mentioned if the contract could only be performed under a specific time period then the parties are left with no option but to terminate the contract. Additionally if the situation has existed longer than the anticipation then also the contract will stand terminated. There has to be a reasonable approach while covering the imposed lockdown or the persisting pandemic under these two doctrines. It will largely depend on the factor whether the contract contains the Force Majeure clause or not.
Contingency is another outlook on the subject, the contingent contract are discussed under Section 32 of the Indian Contract Act 1882. There are the contracts which are entirely dependent on the happening or non-happening of a certain event, i.e. the performance of contract is subjected to a condition. Once the condition is satisfied the contract can be moved forward to get performed by the contracting parties. Under Section 31 of the Indian Contract Act describes the term ‘Contingent Contract’ as: ‘A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen’.
Taking an example of Insurance Contracts, these contracts can also be termed as Contingent Contracts as the payment of insurance money is dependent on the happening of an event. The question did arise in the current scenario that whether the spread of Corona Virus in India as well as other Countries will be considered under Force Majeure clause. The Government of India through its Memo number F. 18/4/2020 PPD dated 19-02-2020 issued by the Deputy Secretary of Govt. of India, Ministry of Finance stated, the spread of corona virus is to be considered as a happening of a natural calamity thus Force Majeure clause can be invoked whenever it is considered appropriate with the following of due procedure. It must also be mentioned that only those contracts that are related to supply chain can be given a relief under Force Majeure clause. It does not cover all kinds of commercial contracts. Whether there is an existence of Force Majeure clause in the contract and whether fundamental basis of contract were affected by the pandemic were the questions to be decided by the Judiciary. The memo has a very limited coverage; it does provide a protecting shield to all kinds of commercial contracts. There either has to be an application of Force Majeure or Frustration of Contract. If the answer affirms to the above points there shall be an applicability of Force Majeure. But if the answer to above is negative then the Contract will come under the Doctrine of Frustration.
Judgment Analysis
South East Asia Marine Engineering and Constructions Ltd. Vs. Respondent: Oil India Limited
(Civil Appeal Nos. 673 and 900 of 2012 Decided On: 11.05.2020)
Brief facts of the case:
• The Appellant and the Respondent entered in an agreement for well drilling and other auxiliary operations. The contract was entered for two years, later got extended and had finally expired. While the contract still existed, the prices an essential material, High-Speed Diesel got a spike.
• The Appellant raised a claim that that change in price has also catalysed the change in law Clause under the contract thus it creates a responsibility on the Respondent to reimburse the same. On the claim being constantly rejected the Appellant invoked the arbitration clause and the matter was thus referred to arbitration which comprised of three arbitrators.
• The majority opinion allowed the claim of the Appellant to be awarded along with interest. According to the tribunal the Circular issued by the State or Union is not the law in actual sense but has a binding power of law. The award was however challenged by the Respondent but the Guahati District Court upheld the award.
• The matter later moved to the High Court of Gauhati. The court came up with a point that the contract was based on a fixed rate. Before getting into tender process, mitigate the risk to such an increase. If the tender stood for the limiting of price variation, then the interpretation of the Arbitral Tribunal couldn’t have had stood right as it would defeat the explicit wordings and purpose of the contract. There is no denial that there would have been price fluctuations and any prudent• contractor would have considered that. This should have been sighted before bidding the tender. The court decided to set aside the award as it was held to be erroneous and was against the public policy of India. The Appellant later aggrieved by the High Court’s decision moved to the Supreme Court of India to file a Special Leave Petition against the impugned judgment.
Interpretation of High Court on the Doctrine of Force Majeure:
• The court observed that parties agreed to keep the Force Majeure clause in the agreement, under this doctrine performance of contract can be put at bay because of an act of God or even Regulations of the Government to rescind a contract. This way the clause 23 of their contract is very similar to the Force Majeure clause. Besides that the Court also declared that the approach to save rights and obligations of contracting parties also makes pari materia to “doctrine of Frustration and Supervening impossibility”.
• The provision for Force Majeure is stated under Section 56, according to which upon the occurrence of an event which renders an impossibility of performance, thereafter the contract becomes void. Indian law recognises Doctrine of Frustration and supervening impossibility and illegality. And the word impossible is to be taken in a sense of practicality; it does not leave the matter to be determined by the intention of the parties.
• If in case the agreement becomes void due to the above doctrine, any advantage received under the said agreement also becomes void. Under Section 65 of the Indian Contract Act, the benefit is meant to be restored back to the other party.
• The contract had very evidently recognised Force Majeure clause and they had also agreed to pay for Force Majeure rate in occurring of an event which is ‘temporary’ in nature.
The Decision Thereof
• The contract was based on a fixed rate. The parties enter a contract to mitigate the risk before they get into the process of tender.
• If limiting the price variation was not the purpose of the tender, then the decision of the Arbitral Tribunal cannot be upheld. It defeats the specifications of the contract, price fluctuations cannot be brought under the 23rd clause of the contract unless there is any substantial reason of inclusion.
• Mere difficulty and inconvenience to the party is not Force Majeure.
Conclusion
In the Indian Jurisprudence there has been no explicit use of the doctrine of force majeure that saves the party from performing the contract. The Indian courts have an approach to dissect the issue solely based on the facts of the respective case. Considering all these points relief is granted to the party. Even though the Indian law is receptive towards the Doctrine of Force Majeure but an inclination towards the Doctrine of Frustration is seen time and again in the relevant cases. If the performance seems to be possible to the party, then the party must repel from construing frustration in their case. Covid-19 should be ideally viewed as a temporary situation; the parties must have a rational approach while making the decision of terminating the contract.
